10% Penalty for early pension/401(k)distributions prior to age 591/2.

[KIP KRAUS]

Does anyone know of a court case or otherwise where the 10% early distribution penalty under IRC Section 72(t) has been challenged?

Or do you know of a tax case where a ruling has been made?

I have always thought that it is an arbitrary/illegal tax, and may want to fight it unless it's already been decided.

[Guest Dook]

Given that Congress has the power to impose taxes, and they have, by this same power, given us a temporary break from taxes by allowing deductions for contributions to qualified plans, what makes the 10% withdrawal penalty arbitrary and illegal? The tax break is given with the idea that you are saving for retirement.

If you don't want to abide by the "house" (pun intended) rules, don't play the game (don't put money into a qualified plan)

Do you live in Montana?

Who agrees/disagrees?

[Guest [Pat M]]

Given that the Supreme Court historically avoids making any decisions against the original enforcement language in ERISA, I agree. Let's get the marriage penalty taken care of first, O.K., KIP?

[KIP KRAUS]

DOOK:

First off, you can click on my profile and find out where I live.

If the 10% penalty for early distributions is not arbitrary why did it take 15 years to decide that this provision was needed? I was contributing to 401(k) plans way before this usury tax was applied. How ironic that this provision was added under the Taxpayer Relief Act of 1997. It’s no relief for people who need some of their money to survive on during hard times, like extended unemployment, which happened to me because of a corporate buy-out in 1997.

However, the morons did exempt people in the following classes from the 10% penalty:

1. Distributions on or after age 591/2 (why not age 50 or even 59)

2. Beneficiaries at death of employee (makes since)

3. Employee’s disability (makes since)

4. Equal periodic payments for life of employee (who really cares?)

5. After termination of employee after attainment of age 55(What’s the difference in this than getting it at age 591/2? You have to be terminated to get a distribution from most plan at any age except 701/2)

6. Stock dividends of a corp. described in Section 404(k). (don’t really care)

7. Employee medical expenses up to max allowed as personal deduction under Sec. 213 (makes since)

8. Payments to alternate payees under QDROs (my personal favorite exemption. I guess the morons figure that the alternate payee didn’t have any financial advantage while living with the employees who was taking advantage of the tax deferrals???????)

9. Distributions to unemployed persons to pay health insurance premiums. (Another one of my personal favorites. I guess it doesn’t’ matter that a person could lose their house while unemployed as long as they have health insurance and stay off the Medicaid dole?)

Of course this usury tax is arbitrary. And just because it was passed by congress doesn’t make it legal. It’s not tested yet is all.

I don’t mind rendering unto Caesar what is due Caesar. I paid the state and federal taxes on my contributions, employer match and earnings thereon, that’s not enough?

PatM, you think the marriage tax will ever get resolved? I hope so, but I doubt it. Why should the government give tax relief to married people who do nothing but produce future taxpayers and bring stability to the system? We need more than married penalty relief, we need total tax relief.

[Guest Dook]

The 10% excise tax on certain early withdrawals was enacted as a part of the Tax Reform Act of 1987, not the Taxpayer Relief Act of 1997. So it does have a little bit more history behind it than you may have thought.

And be aware, you are talking about a very special breed of morons... Congressional Lawyers!!!!!

[Guest [Pat M]]

Yes, the marriage penalty tax will be resolved. As to the outcome of the final resolution, who knows?

On the QDRO issue, do you really want the participant to have to pay an extra 10% in taxes when the Order was/is for child support?

[KIP KRAUS]

I think enough has been said. Tax Reform Act of 87 does sound right. It's hard to keep up with what happened at what time. At least they didn't tack it on to the end of some totally unrelated major trade or tarff legislation.

It's nice to know that this special breed looking out for my best interest. I wonder what a person with a real job would do???????

[KIP KRAUS]

PatM

I don't think the law makes a distinction regarding an alternate payee(not the participant)having children or no children. I may be wrong, but as far as I know, the law simply exempts alternate payees. I see alternate payees named in QDROs all of the time in divorce cases where no children are involved. I've never seen a QDRO reference a settlement as child support either. Child support,to me is a whole other issue.

[jlf]

The 10% penalty tax became necessary because "too many" were simply abusing these tax-deferred savings plans by using them as a substitute for passbook savings. 403(b)plans have been around since 1959. These participants simply deferred part of their salaries and made withdrawals at will; with the withdrawal subject to regular tax rates. (This was a great selling feature which was emphasized by the 403(B) vendors.) This is the rational for the early distribution restrictions.

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yes

[KIP KRAUS]

PatM:

Thanks but no thanks. Those references are the most convoluted bunch of glittering generalities I every seen. It just goes to show you how twisted the minds are that write the tax laws.

jlf:

My response politely to you is so what? As long as the taxes get paid the government shouldn't care. And while we're at it,what is the rationale of having fica taxes apply to 401(k) contributions and not Section 125 contributions? We all love the benefits from not paying fica taxes in our 125 plans, but how many billions of dollars are being diverted from the Social Security System through these plans? I haven't been able to find out. Anyone know?