Is paying an IRS tax from an IRA an exception to early withdrawal penalty
2 Part Question: In regards to the 10% early distribution from an IRA, one exception is if the distribution is made on account of a levy under IRC Section 6331 on the qualified retirement plan. If a taxpayer’s only substantial liquid asset is an IRA and takes an early distribution to pay an IRS assessment from an audit, my contention is that it does not qualify for the exception as the levy wasn’t against the IRA itself. Is that correct?
Second, if the taxpayer has been taking 72t withdrawals for several years (substantially equal periodic payments) and takes another withdrawal to pay the IRS assessment, would that be considered a “modification” and break the 72t, causing the taxpayer to owe the penalty tax retroactively to the first distribution?
Permalink Submitted by Alan - IRA critic on Wed, 2013-12-18 22:02
Yes, you are correct. The IRA must be levied for the penalty exception to apply.The gross annual distribution for a 72t plan would include any withholding taken on the distribution. But if the taxpayer distributes more than the calculated amount, the plan would be busted.Note that a 72t distribution is not eligible for rollover, but extra amounts are. Therefore, as long as the taxpayer does not violate the one rollover rule for 12 months, they could take a distribution to pay an assessment and roll that amount back to the IRA within 60 days to avoid busting the plan.