10% Penalty Exemptions

[Guest MbCarey]

I understand that a distribution to a beneficiary from a 401(k) plan due to the death of a participant prior to age 59 1/2 is one of the exceptions. But can someone clairfy for me that a participant who dies at age 45, his spouse receives the proceeds from his retirement account and rolls it into an IRA. Subsequently, she needs to take paymetns from this account in order to supplement her income. Are these payments also exempt from the 10% Penalty. The spouse is also age 45. I believe the answer is yes, but I am hoping some one will clarify that this is correct.

[Belgarath]

Unfortunately, the answer is no. If the IRA had been maintained in the name of the deceased and the surviving spouse took distributions from that, then the answer would be no - but when the spouse rolls it over to their "own" IRA titled in their own name and not as beneficiary, then subsequent distributions are subject to premature distribution penalty taxes, unless one of the other exceptions applies.

[Guest MbCarey]

The momey was orignally in a 401(K) plan when the participant died, then the wife rolled the money to an IRA in her name? Would distributions from that still be subject to the 10% withdrawal if she takes periodic payments from it?

[Belgarath]

As I said, if one of the other exceptions applies, then no premature distribution penalties. A bona fide "substantially equal periodic payment" withdrawal is one of the exceptions under IRC 72(t).

I strongly recommend that you refer this person to tax counsel.

[GMK]

And correct me if I'm wrong, but I think this:

If the IRA had been maintained in the name of the deceased and the surviving spouse took distributions from that, then the answer would be no

refers to the surviving spouse choosing to do a rollover to an IRA that she treats as an inherited IRA (maintained in the name of the deceased with the surviving spouse as the beneficiary). If you treat the IRA as an inherited IRA, payments from the IRA will not be subject to the 10% additional income tax on early distributions, but you will have to start taking required minimum distributions based on when the deceased would have reached age 70-1/2.

The instructions for IRS Form 5329 list exceptions to the 10% additional income tax, or see pages 12 and 16 of this pdf:

http://www.irs.gov/pub/irs-drop/n-09-68.pdf

[Guest MbCarey]

Thanks GMK.

Great information and it does clarify things. As a matter of fact, we just did an Inherited IRA recently and just for this reason. I had forgotten though.

[GMK]

Of course, keep in mind that we are strangers, and you don't know if we know what we're talking about.

After further review, it seems odd that you didn't ask the experts at this company:

http://bbrserviceslp.com/expertise.html

I don't know this company, but you might, and they list qualified retirement plans as an area of expertise.

(No need to reply. It doesn't really matter to me.)