10% early withdrawal penalty for the clergy
Hello everyone. I have a member of the clergy (pastor) as a client. And for the clergy, their distribution from eligible 403b is eligible to be excluded from income, subject to certain conditions. For example, if he takes $10,000 distribution from his church 403b, that amount is eligible to be excluded from income and treated as Housing Allowance (assuming qualified conditions are met). However, if this clergy is under the age of 59.5, will he still be penalized the 10% FOR EARLY WITHDRAWAL? Or does that 10% early withdrawal penalty not apply at all because the distribution is eligible for Housing Allowance given his clergy background? Thank you in advance for your help on this.
Alex
Permalink Submitted by Alan - IRA critic on Mon, 2020-11-09 19:32
The penalty will not apply to the non taxable portion of the 403b distribution, which will be excluded as housing allowance on Form 1040. The penalty will apply to amounts in excess of the allowance, so this follows the usual rules that the penalty only applies to the taxable portion of a distribution.
Permalink Submitted by Alex Kim on Tue, 2020-11-10 02:14
Thank you