Life and Death Planning for Retirement Benefits

CHAPTER 9: DISTRIBUTIONS BEFORE AGE 59 ½

Which “early distributions” the 10 percent penalty under § 72(t) applies to, and how to avoid it.

This Chapter provides an overview of the 10 percent “early distributions” penalty. For more extensive discussion, see the Special Report: 10% Penalty on Early Distributions ( Appendix C ). 9.1 10% Penalty on Early Distributions § 72(t) imposes a 10 percent penalty on retirement plan distributions made to a participant who is younger than age 59½. This ¶ 9.1 describes the penalty. ¶ 9.2 and ¶ 9.3 discuss one useful exception to the penalty, the “series of substantially equal periodic payments” (SOSEPP). ¶ 9.4 explains the other 13 exceptions. For application of the penalty in connection with Roth retirement plans, see ¶ 5.5 . See ¶ 3.2.08 for how the penalty applies to an under-age-59½ surviving spouse-beneficiary. Be aware that distributions (even inadvertent distributions) to a participant under age 59½ generally trigger a 10 percent penalty in addition to income taxes. Note carefully the requirements of any possibly applicable exception ( e.g. , make sure it is available for the type of plan involved). Do not expect the exceptions to operate in a logical, fair, or consistent manner. The penalty does not apply to post-death distributions (see ¶ 9.4.01 ), but a surviving spouse who rolls over death benefits to her own retirement plan loses the exemption for death benefits. See ¶ 3.2.08 . § 72(t) imposes a 10 percent additional tax on retirement plan distributions. The penalty does not apply to distributions made “on or after the date on which the employee attains age 59½.” § 72(t)(2)(A)(i) ; PLR 2004-10023. The tax is 25 percent rather than 10 percent on certain early distributions from “SIMPLE” ( ¶ 8.3.13 ) retirement plans; § 72(t)(6) . This additional tax is usually referred to as the 10 percent penalty on “early distributions” or “premature distributions.” § 72(t)(1) says that the penalty applies to any distribution from a “qualified retirement plan (as defined in § 4974(c) ).” § 4974(c) ’s definition of “qualified retirement plan” includes 401(a) plans (true “qualified” retirement plans) as well as 403(b) arrangements and IRAs (both of which are not normally included in the term “qualified retirement plan”). It also includes other types of plans not dealt with in this book. Although § 72(t) includes all of these plans in the term “qualified retirement plan,” in this book the term “qualified retirement plan” (QRP) refers only to plans qualified under § 401(a) , as distinguished from 403(b) arrangements and IRAs ; see ¶ 8.3.12 . There are no regulations. The IRS’s position is revealed in IRS publications, Notices, cases, and private letter rulings. Several aspects of the penalty (and its ever -growing list of exceptions) are not clear. The § 72(t) penalty on early distributions What practitioners must know

How the penalty applies to particular distributions