Early Distributions and the 10% 'Penalty'
Rosenberg, Kenneth M., The CPA Journal
Under IRC Sec. 72(t), taxpayers are penalized for receiving early distributions from qualified retirement plans before age 59-1/2. The penalty is 10% of the amount received and included in gross income by a participant (employee) from a qualified retirement plan (pension plan, IRA, etc.) as defined by IRC Sec. 4374(c).
However, there are specific exceptions that have been written into this law. These exceptions allow distributions to be free of this 10% additional tax. They are as follows:
* Distributions made on or after the calendar year in which an employee attains the 59-1/2. IRC Sec. 72(t)(2)(A)(i).
* Distributions made to the employee's estate or to a beneficiary on or after the death of an employee. IRC Sec. 72(t)(2)(A)(ii)!.
* Distributions that are attributable to an employee's being disabled. IRC Sec. 72 (t)(2)(A)(iii)!. Disability is defined per IRC Sec. 72(m)(7).
* Distributions of equal and periodic payments (annuity) based upon the life expectancy of an employee who is separated from service or joint life expectancies of the employee and his/her designated beneficiary. IRC Sec. 72(t)(2) (A)(iv)!. There is a special rule if the periodic payments are subsequently modified. If the modification occurs before the employee attains age 59-1/2 or the modification occurs before the close of a five-year period even after the employee reaches age 59-1/2, then the penalty is imposed in the first year of modification as if the exception did not apply. …