Age 55 Plan Exception 10% Penalty
I attended your workshop in San Diego last week and need clarification on the Age 55 exception to the 10% penality. I understood the exemption to apply to those who are 55 and terminated service and take an annuitized distribution. Your statement would lead me to assume a lump sum payment would be exempt? See program material page 373. Please confirm. Thanks
Permalink Submitted by Alan Spross on Mon, 2010-11-08 20:54
The age 55 exception applies to any payments initiated after separation from service in or after the year of the employee’s 55th birthday, including a lump sum. Depending on how long employee has to go to reach 59.5, if they meet the exception AND if the plan will offer flexible payments, a 72t plan with all it’s rigid requirement can be avoided. The trade off is taking such a large lump sum that the marginal tax rate increases in any amount that is as much as or greater than the 10% penalty.
The exception does not apply if the employee separated prior to that year and waits until 55 to request a distribution.
With respect to annuitized distributions, if they are paid for single of joint life expectancies they are also exempt from the penalty even if they start prior to the above periods.
NOTE: I don’t have the material you refer to. Does the person need a large lump sum that will not be rolled over to pay expenses?
Permalink Submitted by Tim Syrell on Mon, 2017-02-13 15:21
Sirs,My client is planning on retiring this spring. He is going to be 58 y/o in April. He has a pension cash balance of approx. $800k and a 401k balance of approx. $145k. Our plan design includes effecting an IRA Rollover, purchasing a FIA & an IUL. He plans on taking immediate distributions from the IRA Rollover to fund the purchase of the IUL (this will be series of taxable distributions), but the FIA purchase will be under the IRA Rollover umbrella. He will be taking withdrawals immediately from the FIA, but will be waiting 5 – 7 years to starting tapping loans from the IUL.The question is, can he do an Conduit IRA Rollover & take distributions from that AND avoid the pre-59 1/2 penalty tax?
Permalink Submitted by [email protected] on Tue, 2017-02-14 18:10
Alan,Is this the type of discourse you support on this forum? This is at least the second time that this individual has berated/insulted someone that has posted on here looking for help. Does he work for/with you on this site? Is he seriously stating that no one that retires will ever need permanent insurance? Does he not know that Ed Slott himself promotes the use of life insurance as a method of obtaining tax-free income in retirement and that the only way that can work is through a permanent policy? If this is the type of discourse you will allow, I will stop recommending folks come to this site for help. Finally, is tim@retire…. not entiltled to an answer to his question? -m
Permalink Submitted by Alan - IRA critic on Tue, 2017-02-14 18:33
m- I have no influence over who or what is posted here and am not a monitor for this forum. I just post more than anyone else. Spirit Rider is highly knowledgeable and has made many valuable posts on this and other forums, but perhaps did not realize that planners constitute a major portion of the users of this forum as opposed to do it yourself taxpayers or that Ed recommends life insurance products in certain cases.For the original poster’s IRA question – unless his brother qualifies for one of the IRA penalty exceptions, the remaining option is a 72t plan. These plans must run a minimum of 5 years and are inflexible. Currently, the interest rates generate an annual distribution of around 5% of the IRA balance. While it is rare to initiate a plan just 18 months short of age 59.5, if the plan is busted the retroactive penalty and interest only applies to distributions taken prior to 59.5. Therefore, distributions for 2017 should be made after 59.5 if possible as insurance against busting the plan, or if the actual 72t calculation is inaccurate.
Permalink Submitted by [email protected] on Tue, 2017-02-14 19:40
Alan, thank you for the response. I was under the impression you were host of this forum. My apology for that assumption. Your contributions are always professional and helpful and, at least for me, give the appearance of ownership. Do you know who does monitor, or is responsible for, the forum, and its contents? -m
Permalink Submitted by Alan - IRA critic on Tue, 2017-02-14 20:10
Last I knew it was Jared Trexler – pull down tab above, Marketing and Communications.
Permalink Submitted by Jessica Ricci on Tue, 2017-02-14 20:29
Thank you for bringing this our attention. This post has been deleted. If you know of another instance in which this has happened, notify us. This forum is checked several times a week but the volume and scope of the posts can make it difficult to identify posts of this nature immediately.