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10% excise tax on premature distributions


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From the IRS website regarding the 10% excise tax due to premature distribution:

"The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

  1. Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (State or local government) who separated from service on or after you reached age 50."

I deal only with qualified plans. Every now and again I'm asked by someone who is age 55 if the tax applies to them and I'm wondering why in the qualfied plan arena the powers that be didn't just make it 55 instead of 59 1/2?

anyone know?

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Not that there is any material distinction between the 10% early distribution tax and an excise tax (it's payable irrespective of income level, deductions, exemptions or credits), but it was recently learned that it is not an excise tax - it is an additional tax or an additional income tax. "Your Rollover Options" calls it an "additional income tax", while IRS Topic 558 refers to it as an "additional tax". It appears on the Form 1040 after the taxable earnings are determined and after the regular income tax is determined (both of which cannot be less than $0) as one of the additional taxes, where no offset is provided for. Just saying.

If separation occurred before 55, the tax is due until 59 1/2. If separation occurred on or after 55, the tax is waived. IRAs, of course, key exclusively off of age 59 1/2.

Always check with your actuary first!

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Just a reiteration of the distinction you have already made:

For the terminated at age 55 provision, it is "In the year you turn age 55" or any subsequent year. So, if you terminate employment January 1, 2016 and turn age 55 on December 31, 2016; any distribution during 2016 from the qualified plan will be exempt from the 10% early withdrawal penalty.

The age 59-1/2 provision, it must be 6 months after your 59th birthday; there is no "in the year of" provision.

You've already made that distinction, but I thought it was worth reiterating or other readers.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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Every now and again I'm asked by someone who is age 55 if the tax applies to them...

The response might depend on your relationship to the participant. If you are a plan representative, or a record-keeper, or a trustee, it may be appropriate to offer no response, other than "see your tax advisor".

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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My educated guess is that the budget people (CBO) determined that the taxes generated by setting the bar at age 59.5 would be sufficient to offset other spending in the same bill. Same thing for MRD rule at age 70.5.

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