Case — Qualified Retirement Plan Early Withdrawal Tax

Thanks for sharing!

TL Case Summ

THE QUESTION

Do retirement plan distributions made to an employee who is age 55 qualify for an exception to the 10% early withdrawal tax?

THE DISPUTE

Taxpayer Says: Retirement plan distributions made after age 55 are not subject to the additional 10% tax.

Internal Revenue Service Says: The exception only applies when the taxpayer is over age 55 at the time of separation from service.

THE LAW

From Internal Revenue Code Section 72(t)(1): Provides for an additional tax of 10 percent on withdrawals from qualified retirement plans.

From Internal Revenue Code Section 72(t)(2)(A)(v): Provides an exception to the additional 10 percent tax for distributions made to an employee after separation from service after attainment of age 55.

THE CAUSE OF THE DISPUTE

As a general rule, you have to pay ordinary income tax on retirement plan distributions, no matter what age you are when you take the distributions. In addition, when you make withdrawals prior to normal retirement age, those amounts are generally subject to an extra 10% tax. However, the tax code provides numerous specific exceptions to the additional tax.

In this case, the taxpayer retired at age 53 and took an early distribution from his retirement plan when he turned 55. The taxpayer believes that because he was age 55 when he took the distribution, the 10% tax does not apply.

The IRS says the age 55 exception only applies if the taxpayer is age 55 when he leaves his job.

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

Download (PDF, 11KB)

***

HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

***

Other posts you might enjoy

Decisions — Taxing choices Image source: Free Picture © Semen Barkovskiy Dreamstime Stock Photos   How many options can you consider before you find yourself longing for simplicity? Whatever your answer, part of the desire for less complexity comes from not wanting to make the wrong choice. That's especially true ...
Decisions — Where’s your refund? Image source: By U.S. National Archives and Records Administration, Public domain, via Wikimedia Commons Where's your refund? Possibly helping to reduce the federal budget deficit, if you failed to file a return to get an overpayment back within the applicable time period. That's because the gov...
Case — Fun and games Image source: openclipart.org (public domain image) THE QUESTION Does an organization that offers a recreational activity to achieve a charitable purpose qualify as a charitable organization? THE DISPUTE Taxpayer Says: It operates for charitable purposes because it provides relief for the p...
Case — Carry On THE QUESTION Can an IRA deduction that is disallowed due to active participant status in an employer plan be carried forward and deducted in a future year? THE DISPUTE Taxpayer Says: The 2008 IRA contribution was an “excess contribution” and should be allowable as a deduction in 2010. Intern...
Sorry, wrong answer :(
Right answer!
For the IRS. In all cases, the exception applies only if the participant has attained age 55 on or before separation from service. (See House Conference Report 99-841 (Vol. II), at II-456 to II-457 (1986), 1986-3 C.B. (Vol. 4) 1, 456-457.)
Posted in Taxing Lessons Case Summaries Tagged with: