How much of Lucy's $12,000 early IRA distribution is subject to the early withdrawal penalty?

When considering early IRA distributions, particularly before reaching the age of 59½, it is important to understand the implications of the early withdrawal penalty. Typically, distributions from an Individual Retirement Account (IRA) are subject to a 10% penalty tax if taken before this age, unless certain exceptions apply.

In this scenario, Lucy has taken an early distribution of $12,000 from her IRA. The question specifically asks how much of that amount is subject to the early withdrawal penalty. The IRS allows for various exceptions where individuals can withdraw funds without incurring the penalty, such as for first-time home purchases, qualified educational expenses, medical expenses, or federal disaster distributions, among others.

However, if none of these exceptions are applicable to Lucy's situation, the standard rule applies, where the entire distribution amount would be subject to the penalty. If it is determined that $2,000 is attributable to contributions or is otherwise exempt from penalties (potentially from prior contributions or earnings on more than the basis), that amount would not be subjected to penalty taxation.

Thus, only $10,000 of the distribution would be subject to the early withdrawal penalty, leading to the conclusion that $2,000 of Lucy's distribution is not subject to this penalty. This