A 62-year-old policyowner takes a taxable distribution from a policy that has become a MEC. Which statement about the 10% penalty is correct?

Why D is correct

The 10% penalty on MEC distributions applies only to amounts received before the taxpayer reaches age 59½. At age 62, the owner has passed the threshold, so the distribution is taxable to the extent of gain under the LIFO rule but is not subject to the 10% early-distribution penalty. The penalty is an early-withdrawal deterrent; once the owner reaches 59½, that deterrent no longer applies, although the ordinary income tax on the gain portion remains due. The age threshold is the single decisive factor for the penalty's application.

Why the other options are wrong

• A) The penalty does not apply after age 59½; it is specifically an early-distribution penalty tied to the owner's age. Once past the age, the penalty ends. At 62 it is already gone.
• B) There is no $50,000 amount threshold for the penalty; the penalty turns on the owner's age, not on the size of the distribution. Amount is never the trigger. Age is the only factor.
• C) There is no reduced 5% penalty tier; the penalty is 10% before age 59½ and zero after that age. The penalty is all or nothing. There is no middle rate.

Memory hook

Cross 59½ and the 10% MEC penalty evaporates — only the income tax remains.