Individual under age 59.5 receives correspondence saying they can now begin their pension monthly payment or receive a lump sum for the balance that represents their pension. If they elect that distribution is there a 10% penalty even though there is not one to choose the monthly payments while under 59.5? Thanks,
As long as they separated at 55 or later, there is no 10% penalty on any distributions that they do not roll over to an IRA. It does not matter what their age is now, but obviously it would be 55 or later. For amounts rolled over to an IRA and later distributed from the IRA, the penalty applies up to age 59.5. If they elected a life annuity, those amounts would be taxable, but no penalty and the monthly payments cannot be rolled over.
Okay understood. It’s not obvious that person is over 55 now though. Separated from service at 43, worked elsewhere following vesting in that pension. Now over 55 and received a letter saying a lump sum is an option that never existed before.
Original Poster.Completely different rules for pension vs 401k. I will defer to others for expert opinions and advice.
Permalink Submitted by Alan - IRA critic on Mon, 2017-05-08 20:42
Did the individual separate from service in the year they reached 55 or later? If so, there is no penalty. With or without the penalty, the individual would probably roll over most of a lump sum distribution, rather than having the entire amount taxable in a single year which would likely result in an increased marginal tax rate for that year.
Permalink Submitted by Brian Kuhn on Tue, 2017-05-09 14:58
Okay thanks that’s what I thought. They did not separate prior to age 55. They are over age 55 right now while being given the choice. But that’s irrelevant correct?