IRS Implements Lifting of 10% Early Withdrawal Penalty for Reservists

The Internal Revenue Service (IRS) said in a news release that the change was being applied to eligible reservists activated after September 11, 2001, and before December 31, 2007.

That means eligible reservists taking early distributions from their Roth and regular IRAs as well as distributions of a reservist’s elective contributions and earnings distributed to him or her by employer from their 401(k) and 403(b) plans no longer have to pay the extra 10% penalty for taking money before age 59 ½.

The new Pension Protection Act (PPA) included a provision allowing this change for reservists called to active duty for at least 180 days or for an indefinite period, according to the IRS announcement. The IRS officials said regular income taxes continue to apply to these payments in most cases.

Also, because the change is retroactive, eligible reservists who already paid the 10% tax can claim a refund by using Form 1040X to amend their return for the year in which the retirement distribution was received. Eligible reservists should write the words, “active duty reservist,” at the top of the form. In Part II Explanation of Changes, the reservist should write the date he or she was called to active duty, the amount of the retirement distribution and the amount of early distribution tax paid.

Reservists can choose to re-contribute part or all of these distributions to an IRA. Ordinarily, these special contributions must be made within two years after the reservist’s active duty period ends. However, if the reservist’s active duty ended before August 17, 2006 (the date the new law was enacted), he or she will have until August 17, 2008, to make these special contributions. No deduction is available for these contributions.