Advanced Underwriting Consultants

Question of the Day – September 10

Ask the Experts!

Here’s the question of the day.

Question:  My 51 year old client is retiring from the police force this year.  If he takes money out of his 403b plan after retirement, is the distribution subject to the 10% penalty tax?

Answer:   Probably not.  There is a special exception to the 10% penalty tax for public safety employee retirees.  If a distribution is taken by a participant who retired from the employer sponsoring the plan at age 50 or later, then the distribution is exempt from the penalty tax.  The distribution is still subject to ordinary income tax.

Note that the special exception will be lost if the 403b plan balance is rolled over to an IRA.

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. 

Question of the Day – January 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: If a 401(k) plan participant retires in the year she turns 55—even if she is actually 54 on the day of retirement—does she qualifies for the age 55 exception to the 10% penalty tax on distributions from that 403b plan?

Answer: Yes.

The IRS has interpreted the age 55 separation requirement to be satisfied if the participant separates from service during the calendar year in which he reaches age 55, even if the actual separation date is before her 55th birthday.  See IRS Notice 87-13, A-20, which says:

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.

Thus, the taxpayer qualifies for the exception to the penalty tax.

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.