early retirement penalties?

[Guest Mr. Nick]

Am retiring from public school service next year at age 47. What are the tax consequences of distribution of 403(B)(7) monies at that time? What does section 72(t)(2)(A)(iv) state? Thanks.

[Michael Devault]

Distributions prior to age 59-1/2 will be subject to ordinary income tax PLUS a 10% premature distribution penalty. The section to which you refer is a way to avoid the 10% penalty. Under that provision, if you take a series of substantially equal periodic payments, the Service views it as taking a retirement income from the TSA, which is not subjected to the penalty. However, once you begin receiving payments, you must continue to receive them, at least annually, for the later of 5 years or when you attain age 59-1/2.

The Service has three "approved" methods of determining what consitutes a series of substantially equal periodic payments. It is contained in IRS Notice 89-25.

Hope this helps.