Early Distribution Exception

[Gloria]

For those of you that are experienced with early distributions, please help me with the following question:

Does the following mean that the person needs to work until the day the persons turns 55 or does it mean that the person needs to be 55 during the tax year?

From Publication 575 (Page 33): Additional exceptions for qualified retirement plans: The tax (early distribution tax) does not apply to distributions that are: From a qualified retirement plan after your separation from service in or after the year you reached age 55.

If a person's job is eliminated a week or two before reaching age 55, can the person take out distributions without the penalty or would the penalty apply?

Thanks for your response/s.

[Lion EA]

Don't know where to start, but I have a vague memory that the distribution has to take place after age 55 AND after separation from the job. Does Pub 575 give a link to the tax code so you can go straight to the horse's mouth?

[Gloria]

No, there is no code reference. The distribution would only take place if the person's position is eliminated and is laid off. The concern is that the person will be a few weeks short of turning 55 when the lay off's occurr. So if the person is not 55 when the layoffs occur, does that mean that the penalty will apply eventhough the person would be 55 when the distribution request is made?

[jainen]

>>if the person is not 55 when the layoffs occur, does that mean that the penalty will apply eventhough the person would be 55 when the distribution request is made?<<

Yes, that's what it means. Code Section 72(t) says, "after separation from service after attainment of age 55."

In Summary Opinion 2011-113, Tax Court cited legislative history to support this interpretation. "In all cases, the exception applies only if the participant has attained age 55 on or before separation from service. Thus, for example, the exception does not apply to a participant who separates from service at age 52, and, pursuant to the early retirement provisions of the plan, begins receiving benefits at or after age 55."

To show his heart's in the right place, the judge added, "While petitioner believes it is unfair and inequitable in these circumstances to hold her liable for the 10-percent additional tax, and we have sympathy for her plight, there is no statutory authority to hold otherwise in this situation. Only Congress can change the statute."

[Pacun]

What matters is when the distribution is released from the administrator. In any event, you will get the 1099-R with the date of the distribution then you compare and pay penalty or not.