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Approx. 4 years ago I began prematurely withdrawing funds from my IRA under the provisions of the "substantially equal periodic payment exception -- Notice 89-25." While I have paid oridinary income taxes on the withdrawal, I have claimed the exception from the penalty (I'm currently 56 years old). A number of things have happened since.

(1) I've increased the amount withdrawn due to increased living costs.

(2) The IRA has increased dramatically in value.

(3) I've had to withdraw additional funds to pay for my daughter's college education.

(4) I still haven't paid any penalty.

Any suggestions as to my position with the IRS? Should I begin paying penalties? Does the change in the value in the IRA have any bearing? Should I voluntarily go back and pay any perceived penalties?

Thanks for your help, Bill
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You are no longer making substantially equal payments. What will happen is you will be assesed the 10% penalty on every dollar you have withdrawn from the account since you started 4 years ago. The IRS will flag it. The longer they wait to flag it the more in penalties and interest you owe them.

I am not sure what the rate is this year I haven't looked, but it is not competitive. I would highly recommend finding a good tax attorney who can represent you in front of the IRS. Perhaps they can work out a deal. Otherwise the longer you wait the more the interest they are due builds up.

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<<Approx. 4 years ago I began prematurely withdrawing funds from my IRA under the provisions of the "substantially equal periodic payment exception -- Notice 89-25." While I have paid oridinary income taxes on the withdrawal, I have claimed the exception from the penalty (I'm currently 56 years old). A number of things have happened since.

(1) I've increased the amount withdrawn due to increased living costs.

(2) The IRA has increased dramatically in value.

(3) I've had to withdraw additional funds to pay for my daughter's college education.

(4) I still haven't paid any penalty.

Any suggestions as to my position with the IRS? Should I begin paying penalties? Does the change in the value in the IRA have any bearing? Should I voluntarily go back and pay any perceived penalties?>>

As Jess pointed out, your posisiton with respect to the IRS is...well...really...ahem..."bend over". It's a sad situation, but as Jess noted, you are no longer taking substantially equal periodic payments. So at least some of your prior distributions will be subject to penalties (those that you used for qualified education expenses may be exempted...read all about it in the Taxes FAQ area).

But I would certainly recommend that you take your computations and distribution information to a qualified tax pro and get the penalties worked out and (hopefully) paid. The LAST thing that you really want is to let this go for years and year...and then get nabbed by Uncle Sammy. You'll have no help from the statute of limitations with respect to these penalties. And the penalty amount accumulates very quickly.

TMF Taxes
Roy

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