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Is the 50% penalty a hard and fast, never broken outcome?

No. Here's the official way for her to proceed.

She completes Form 5329, Part VIII and attaches it to her 2012 return. The 50% penalty is added to her 1040 total due. The she requests a refund. Given her story, which she would fully document in the refund request, they'd probably refund it.

Here's what I'd do.

We call it a penalty, but it's actually an excise tax which, in the law, stands by itself, but for administrative ease has been tacked on to the 1040. The 5329 can be filed by itself. I'd do that now and send it in without payment, requesting that the tax be waived. Include documentation of the actions she took and the distribution. I don't know if it will work, but it's worth a try.

Regardless of what happens the distribution is 2013 income.

Rule Your Retirement Home Fool
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