Terminated participant Age 56 & premature distribution penalty

[Pammie57]

A participant was terminated (fired) on May 2. She is age 56. She has an account balance of $9000 approximately. The plan does not offer an early retirement provision.

Her broker's question is whether she meets an exception to the penalty. He is reading PUB 575 page 35. I was always under the impression that unless you were 59 1/2 - if you took a lump sum distribution upon termination - you paid the 10% penalty.

Would she qualify for the exception and not have to pay any premature penalty if she withdrew the $9000 in lump sum? It certainly looks that way upon first reading .

Am I missing something here?

p575.pdf

[Belgarath]

No, you aren't missing anything - that's one of the exceptions to the penalty.

[Peter Gulia]

"The plan does not offer an early retirement provision."

Under the plan's provisions, does severance-from-employment alone entitle the participant to a distribution?

[Pammie57]

Yes - "distribution made be made in lump-sum; distribution upon termination as soon as feasible after termination."

[My 2 cents]

So she can take the distribution under the plan provisions (apparently) AND, having separated from service after age 55 (voluntarily or otherwise), only needs to pay ordinary income taxes on the distribution.

Of course, in an ideal world, she would have the distribution rolled over directly to an IRA and have no immediate tax consequences whatsoever!!!

[Lou S.]

^to add to the above though if she rolls it to an IRA and then needs to withdrawal money before age 59.5 it would not qualify for the exemption from the 10% penalty in most cases.