Life and Death Planning for Retirement Benefits

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420 Life and Death Planning for Retirement Benefits
9.4.04 QRPs, 403(b) plans: Early retirement
A distribution made to an employee “after separation from service after attainment of age
55” is exempt from the penalty. This exception is available for qualified and 403(b)
plans, but not for IRAs. For government plan distributions to
firemen, policemen, and emergency medical personnel, the age is 50 not 55.
Although limits the exception to distributions made after a separation from service
occurring after the employee’s 55th birthday, Notice 87-13, 1987-1 C.B. 432, A-20, provides that
the separation from service can occur on or after January 1 of the year the employee reaches age
55. See PLR 2002-15032.
An employee who separates from the company’s service before the year he reaches age 55
is not entitled to use this exception; he cannot simply wait until age 55 and then take a penalty-
free distribution. The exception is available only for distributions “after your separation from
service in or after the year you reached age 55.” IRS Publication 575, “Pension and Annuity
Income” (2009), p. 31; Humberson, 70 TCM 886 (1995).
9.4.05 QRPs, 403(b) plans: QDRO distributions
Distributions from a qualified retirement plan or 403(b) arrangement made to an “alternate
payee” under a qualified domestic relations order (QDRO; see are exempt from the
early distributions penalty. This allows a divorcing spouse who is under age 59½ to
receive penalty-free distributions from the share of her ex-spouse’s QRP or 403(b) plan that is
awarded to her in the divorce proceedings (if the QDRO procedures are followed).
However, even though, i Congress provided a means for the tax-free division
of IRAs between divorcing spouses, analogous to the QDRO procedures for qualified plans,
Congress did NOT extend the penalty exception o to IRAs. Thus, a divorced spouse
who receives part of her ex’s IRA under annot withdraw from the account prior to
reaching age 59½ unless she pays the 10 percent penalty or qualifies for some other exception.
9.4.06 ESOPs only: Dividends on employer stock
Under a company can take a tax deduction for dividends paid on stock that is
held by an employee stock ownership plan (ESOP), and the ESOP can pass these dividends out to
the plan participants, if various requirements are met. Such dividend payments are not subject to
the 10 percent penalty.
9.4.07 IRAs only: Unemployed’s health insurance
An unemployed individual can take penalty-free distributions from his IRA (but NOT from
a qualified plan or 403(b) arrangement) to pay health insurance premiums. See for
details.
9.4.08 IRAs only: Expenses of higher education
The 10 percent penalty will not apply to IRA distributions that do not exceed the
participant’s “qualified higher education expenses” paid in the taxable year of the distribution.