Life and Death Planning for Retirement Benefits

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CHAPTER 9: DISTRIBUTIONS BEFORE AGE 59 ½
Which “early distributions” the 10 percent penalty under
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
.
9.1 10% Penalty on Early Distributions
imposes a 10 percent penalty on retirement plan distributions made to a participant
who is younger than age 59½. This describes the penalty. and discuss one useful
exception to the penalty, the “series of substantially equal periodic payments” (SOSEPP).
explains the other 13 exceptions.
For application of the penalty in connection with Roth retirement plans, see See
for how the penalty applies to an under-age-59½ surviving spouse-beneficiary.
9.1.01 What practitioners must know
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 (se , but a surviving spouse
who rolls over death benefits to her own retirement plan loses the exemption for death benefits.
See
9.1.02 The § 72(t) penalty on early distributions
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.”
PLR 2004-10023. The tax is 25 percent rather than 10 percent on certain early
distributions from “SIMPLE” retirement plans This additional tax is usually
referred to as the 10 percent penalty on “early distributions” or “premature distributions.”
says that the penalty applies to any distribution from a “qualified retirement plan
(as defined in .” 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. Althoug 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 as distinguished from 403(b) arrangements and IRAs; see
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.
9.1.03 How the penalty applies to particular distributions