In a 10/4/09 LA Times article Ed was cited as saying that there is an exception to early use of 4o1K funds being penalized as long as you separate from employment after age 55 so that you only have to pay income taxes. What part of the tax code allows this?
Hello I was wondering if their is a penality for early withdrawl on my 401 k to pay a irs tax levy ?Thank You
I have a small percentage of my 401K account as after tax. I made a 2nd withdrawel to satisfy my RMD for 2015 and was shocked to see it was all withdrawn from my after tax account, over $25,000?! I’m afraid that they’ve made a mistake but i’ve not been able to persuade my Plan Administrator that they made a mistake; I’m told all is well and I’ve met my RMD? But this means I haven’t taken the RMD amount out of the pre-tax account, so the 1099 should show that amount as non-taxable or they will incorrectly show it as taxable.Do I have a problem here?
If the plan provisions provided that your after tax balance was distributed first (because it was contained in an after tax sub account which can be distributed separately), the distribution would still satisfy your RMD, but there would be nothing in Box 2a since the entire distribution was of post tax money. Both pre tax and after tax amounts will satisfy your RMD. In other words, if your after tax balance in the plan was reduced, then the amount is not taxable and not shown in Box 2a of the 1099R. It is not clear what you meant by a “2nd withdrawal”. If 2015 is an RMD year for you, the first withdrawal is applied to the RMD, and the 2nd one only applies to the RMD to the extent that the first withdrawal fell short of the RMD amount. Not sure if this addresses your question.
Permalink Submitted by Alan Spross on Thu, 2010-03-25 18:39
72(t)2(A)(v) copied below:
>>>>>>>>>>>>>>>>>
(72t) 10-percent additional tax on early distributions from qualified
retirement plans
(1) Imposition of additional tax
If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.
(2) Subsection not to apply to certain distributions
Except as provided in paragraphs (3) and (4), paragraph (1) shall not apply to any of the following distributions:
(A) In general
Distributions which are –
(i) made on or after the date on which the employee attains age 59 1/2 ,
(ii) made to a beneficiary (or to the estate of the employee) on or after the death of the employee,
(iii) attributable to the employee’s being disabled within the meaning of subsection (m)(7),
(iv) part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary,
(v) made to an employee after separation from service after attainment of age 55,
(vi) dividends paid with respect to stock of a corporation which are described in section 404(k), or
(vii) made on account of a levy under section 6331 on the qualified retirement plan.
>>>>>>>>>>>>>>
But the above is only part of the story. To further define the definition of “attainment of age 55” there is IRS Notice 87-13 1987-1 CB432:
“A distribution to an employee from a qualified plan will be treated as within section 72(t)(2)(A)(v) if (i) it is made after the employee has separated from service for the employer maintaining the plan and (ii) such separation from service occurred during or after the calendar year in which the employee attained age 55.”