age 55 exception 10% penalty

[Lori H]

If i turn age 55 in 2013, quit my job, take a distribution in 2013, I do not pay the penalty. If I turn age 55 this year and terminate next year, receive a distribution in 2014, I do not pay the penalty. This is how I am interpreting the exception. If I turned 57 or 58, I would still be subject to the penalty, yes?

Why age 55?

Thanks

[12AX7]

Notice 87-13:

Q-20: What additional tax on early distributions from qualified retirement plans applies under section 72(t) (as added by TRA'86)?

A-20: Section 72(t) (as added by TRA'86) applies an additional tax equal to 10 percent of the portion of any "early distribution" from a qualified retirement plan (as defined in section 4974© of the Code) that is includible in the taxpayer's gross income. A distribution (including deemed distributions under section 72(p)) is treated as an "early distribution" unless it is described in section 72(t)(2)(A) (taking into account sections 72(t)(3) & (4)). A distribution to an employee from a qualified plan will be treated as within section 72(t)(2)(A)(v) if (i) it is made after the employee has separated from service for the employer maintaining the plan and (ii) such separation from service occurred during or after the calendar year in which the employee attained age 55.

[GMK]

I believe it's that the 10% penalty does not apply if you separate from service if you reach at least age 55 in the year of the separation.

edit: 12AX7 beat me to the post, and with a cite.

[BG5150]

Why age 55?

I think the people at the IRS said, "why not?"

[Bird]

The Code originates in Congress. Maybe somebody's brother needed a break.

[BG5150]

But Congress doesn't make the stuff up all by themselves. They get "experts" to help out...

[12AX7]

The Age 55 72(t) exception confuses a lot of people. There are even people in this "business" that do not even know that it exists! I give a lot of credit to those that know to ask.

[Lori H]

Notice 87-13:

Q-20: What additional tax on early distributions from qualified retirement plans applies under section 72(t) (as added by TRA'86)?

A-20: Section 72(t) (as added by TRA'86) applies an additional tax equal to 10 percent of the portion of any "early distribution" from a qualified retirement plan (as defined in section 4974© of the Code) that is includible in the taxpayer's gross income. A distribution (including deemed distributions under section 72(p)) is treated as an "early distribution" unless it is described in section 72(t)(2)(A) (taking into account sections 72(t)(3) & (4)). A distribution to an employee from a qualified plan will be treated as within section 72(t)(2)(A)(v) if (i) it is made after the employee has separated from service for the employer maintaining the plan and (ii) such separation from service occurred during or after the calendar year in which the employee attained age 55.

i interpret this as saying if I terminate after age 55, I am exempt from the penalty. If I terminate at age 58, then that is "after the calendar year" in which I attained age 55. Thanks for all your responses.

[12AX7]

The last sentence in A-20 is very key to the determination of the exception. You're welcome.

[John Feldt ERPA CPC QPA]

The 10% penalty exception actually allows you to terminate when you are age 54 as long as the year that you separate contains the 55th anniversary of your date of birth.

Example: You terminate February 2013 and are paid out. You reach age 55 in October 2013. No 10% penalty.

Also, for payouts after 8-17-2006, there's is another exception at age 50 for payouts from a DB plan for qualified public safety employees.