10% penalty exemption
I have a client who is 57 yrs old who just recently lost her job. She had over 30yrs with the company and is considered a qualified retiree with the company.
She has a sizable 401-k. Question, can she take a lump sum out without the 10% penalty? Her HR department says yes and I agree, but where is this in the IRS code?
I understant 72T, but she isnt going to take equal substantial payments, just a lump sum of whatever amount when she needs it. Can I get some help on this issue.
Thanks
Permalink Submitted by mk foss on Fri, 2012-09-28 16:45
There is no 10% penalty for a distribution from a qualified plan to an employee who separates from service after age 55. Look at IRC 72(t)(2)(A) (v).
Permalink Submitted by hank suskiewicz on Fri, 2012-09-28 20:23
Thanks for the response, but I looked at the code and again it talks about the equal substantial payment method, nothing about taking a lump sum whenever u want
Any suggestions.
Permalink Submitted by Alan Spross on Fri, 2012-09-28 21:04
Look at the following IRS chart. The age 55 exception is the 5th one on the list (72(t)(a)(v):
http://www.irs.gov/pub/irs-tege/early_distributions.pdf
Obviously no need for a rigid 72t plan. Client needs enough money for two years expenses, and some of the penalty waiver benefit is lost if the plan does not offer her flexible distribution options. If client was forced to take out a lump sum, it’s possible that it will increase her tax bracket and partially offset the benefit of the penalty waiver.