Can Participants Take Penalty-Free Distributions in the Year They Turn 59½?

Q: I read the Ask the Experts column that the age-55 separation from service exemption to the 10% premature distribution penalty tax under Code section 72(t) can effectively apply at age 54 because the exemption is essentially based on the individual’s age at the end of the calendar year. Does this “calendar year” principle also extend to eligibility for penalty-free distributions at age 59½?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Though it seems inconsistent, that is unfortunately not the case. To recap the age-55 termination of employment rule: An individual can take a distribution that is NOT subject to a 10% premature distribution penalty if he/she terminates employment in or after the calendar year in which the individual turns age 55. So, in theory, a 54-year-old can take a penalty-free distribution if the individual terminates employment at age 54, but turns 55 later in the same calendar year.

That caveat does NOT apply to age 59 ½ distributions. If an individual takes a distribution prior to turning age 59 ½, the 10% penalty still applies even if the individual turns 59 ½ later in the calendar year in which the individual takes a distribution.

It should also be noted that these rules only apply to 401(a), 401(k), and 403(b) plans; 457(b) plans are generally not subject to the 10% premature distribution penalty at all.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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