10% early withdrawl penalty

[k man]

in order to qualify for the substantially equal periodic payments exception in 72(t)(4), must the payments be for the life expectancy of the participant? someone in my office seems to think the distributions can be over a period of 5 years. the code seems pretty clear that it is life expectancy.

[ERISAnut]

You are correct.

The issue is that once the payments are started, there cannot be any substantial modification to the payments within 5 years of the date of the initial payment (even if the 5 year period extends beyond age

59 1/2. The calculation itself, however, must be done over the life expectancy.

The substantial modification rule actually states the later of age 59 1/2 and five years; but you get my point.

[k man]

You are correct.

The issue is that once the payments are started, there cannot be any substantial modification to the payments within 5 years of the date of the initial payment (even if the 5 year period extends beyond age

59 1/2. The calculation itself, however, must be done over the life expectancy.

The substantial modification rule actually states the later of age 59 1/2 and five years; but you get my point.

it is sort of a strage rule because at 59 1/2 you would be able to get a lump sum without penalty. so by taking the early distribution you are forced to limit your options.

[ERISAnut]

In many instances, yes. There are always trade-offs. The major issue is knowing what those tradeoffs are and how to evaluate them in order to determine the most effective way to deal with a particular situation.