rule of 72t??

[Guest mam]

A 55 year old woman is offered early retirement, in accordance with the corp's DB plan document (these details are a little sketchy). She accepts the offer, and receives a reduced annual pension of $18k.

Neither her company nor her accountant informed her of any penalties or tax consequences as a result of taking the money, instead of 'rolling' it (if that was even an option). The IRS has billed her approx. $1,600 in penalties for 1999. Her birthdate is 12/29/1938. What's the penalty, and will this 'charge' be an annual event? Is her company liable for not providing her with a tax notice explaining her options? Does any of this have to do with the "Rule of 72t"? These are the only details that I have, and any help or ideas would greatly help me help her. Thanks.

[Michael Devault]

The details are too sketchy for a detailed answer, but, if the penalty is imposed because of premature distributions, there is an exception that will help out. The 10% penalty is not imposed if separation from service occurs in or after the year in which the participant attains age 55.

However, this doesn't appear to be the reason for the penalty. The participant was 59-1/2 in 1998, so there shouldn't be a penalty for 1999.

I suggest you get a few more details from the client to see what the penalty is really for.

Maybe it's unrelated to the pension plan??

[mwyatt]

You state that she received an "18,000 annual benefit". Do you mean she is receiving some form of an annuity? If so, then I would think that since payment is being paid over lifetime, then the 10% excise tax would not apply. Need more details; did she (or is she continuing to) receive annuity payments or did she get a lump sum? Maybe tax due was for underwithholding? More details would be helpful. If she is receiving an annuity then the 72t tax is inapplicable.

[david rigby]

Maybe the retiree simply failed to report her 18K pension on her 1040. Is that too simple?