| Question 94: What is the source of the age "59 1/2" in the Code Section 401(k) distribution restrictions? Do you know why they did not use an even number?
Answer: Short Answer: Age 59 1/2 has been around for a long while. I have no clear answer as to why they did not choose an even number, but in looking at the legislative history of various tax laws, age 59 1/2 may have been used because it somehow related to "insurance age 60." Discussion:
As you mention, attainment of age 59 1/2 is a distribution restriction. See Internal Revenue Code of 1986 ("Code") Section 401(k)(2)(B)(i)(III). 1. The age 59 1/2 limitation for 401(k) plans has been around for a long time. Code Section 401(k)(2) was added by the Revenue Act of 1978, Public Law No. 95-600, Sec. 135(a). The original Code Section 401(k)(2)(B) included the attainment of age 59 1/2 as a distribution limitation. I did not find a discussion of the source of the age 59 1/2 restriction in that law. 2. ERISA (the Employee Retirement Income Security Act of 1974), Public Law No. 93-406, mentions age 59 1/2 restrictions in Code Section 72(m) early distribution penalties. In the legislative history, there is a discussion: "Under present law, in general, where amounts are distributed under a qualified plan to an owner-employee before he attains age 59 1/2, section 72 provides that the tax imposed on such amounts shall be..." (The legislative history goes on to discuss the prior provisions and replacement of the prior tax by a 10% penalty.) House Report 93-779, 1974-3 I.R.B. 359. I did not find a discussion in the ERISA legislative history as to why they retained age 59 1/2 versus use any other age. (The reference to age 59 1/2 had first been added to Section 72(m)(5) by Pub. L. No. 87-792, Sec. 4.) 3. Public Law 87-792, the Self-Employed Individuals Tax Retirement Act of 1962 (perhaps more commonly known as H.R. 10), Sec. 2 included an age 59 1/2 limitation in prior Code Section 401(d)(4)(B). While I did not see a direct explanation in the Committee reports for that law, the legislative history discussion of the restrictions includes a reference to age 59 1/2 with a parenthetical "(insurance age 60)" next to it which may indicate that age 59 1/2 was chosen because it corresponded or related in some way to insurance age 60. Here is an excerpt (includes a reference to age 70 1/2 as a bonus): "The bill requires that new retirement plans established by owner-employees for their own benefit, or for the benefit of themselves and their employees, may not begin paying retirement benefits to owner-employees before they reach age 59 1/2 (insurance age 60) except in the event of death or disability...Distributions of retirement benefits, however, must begin not later than 70 1/2 (insurance age 70)..." House Report No. 378, 87th Congress, First Session, Union Calendar No. 139 (May 9, 1961), Sec. VI.L. Unfortunately, this is as far as I have been able to unravel clues. I did not find an explanation as to why insurance ages 60 and 70 would equate to 59 1/2 and 70 1/2. I did find a summary of proposed legislation introduced on June 25, 1991 (H.R. 2742) that would have replaced age 59 1/2 and 70 1/2 requirements with ages 59 and 70, respectively, for "specified pension plans." This Q/A is not legal advice. Individuals should seek advice based on their particular circumstances from their own counsel. Nothing in this Q&A is intended to be used, and no information can be used, for the purpose of avoiding penalties under the Internal Revenue Code, or promoting, marketing, or recommending to another party any transaction or matter addressed in this Q&A.
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