Any taxpayer with a payout from a IRA or any other pension plan gets hit with a 15% penalty if it exceeds $155,000 per year, which they must pay in addition to regular income taxes. The 15% penalty has existed since 1986.
For the years of 1997-1999, Congress has decided to lift this penalty, meaning if your client were to cash out their IRA, they would get hit with income taxes but not a penalty.
This is really good news for the higher tax bracket, especially for those who exceed that amount. This suspension, however, only applies during the individuals life; his or her beneficiaries still get hit with the estate tax penalty.
This benefits not only helps those who get a payout each year, but also those who want to cash out or partially withdraw money from the IRAs and 401(k) plans. They do not have to pay the penalty on the money they withdraw. Therefore giving them more money to invest elsewhere.
IRAs and 401(k)s are all tax-deferred investments. This means that the money is going to be taxed when your client withdraws it from an account. Its not a bad idea to for them save some money by taking advantage of this provision.