Advanced Underwriting Consultants

Ask the Experts – March 17

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: Can a participant of a SIMPLE 401(k) take a penalty-free distribution if he is age 55 and severed from his employment? Does it matter if it’s a SIMPLE IRA instead of a SIMPLE 401(k)?

Answer: Under Section 72(t), certain retirement plans, including IRAs and 401(k) accounts, are subject to a 10-percent penalty for distributions made prior to age 59 ½ unless an exception is met. The exception to which you’re referring states that as long as the participant is at least 55 years of age and has ended his employment with the employer-sponsor, the 10-percent penalty does not apply. However, this exception does not apply to IRAs.

Since a SIMPLE 401(k) is not an IRA, the age-55, severance from employment exception applies. Therefore, the 10-percent early distribution penalty should not apply to your client’s situation.

Since a SIMPLE IRA is an IRA, the age-55, severance from employment exception does not apply. If an individual takes a distribution, it would be subject to the 10-percent penalty found in Section 72(t).

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.