10% Early Withdrawal Penalty: 59 ½, 55, & 50
By: Peter Thomann, CFP®, MS
Many taxpayers often ask when they can withdraw money from a retirement plan without being subject to the 10% early withdrawal penalty. This brief paper will review the different ages and the rules that apply to each. It should be noted that the 10% early withdrawal penalty does not apply to distributions (after separation of service) from the New York City Deferred Compensation 457(b) plan regardless of age.
The 59 ½ year old distributions are the easiest to understand. Quite simply, once a taxpayer turns 59 ½ years old, distributions will not be subject to the 10% early withdrawal penalty.
The 55 year old distribution exception is a little trickier. This exception applies to the employee who separates from service in or after the year in which he or she attains age 55. For example, assume a New York City Teacher retires at age 56 and elects to receive a distribution from the NYC TRS TDA (403b). In this example, the NYC Teacher would not be subject to the 10% early withdrawal penalty.
The 50 year old distribution exception only applies to distributions from a governmental defined benefit pension plan to a qualified public safety employee (police, fire, etc.). Additionally, the exception only applies to the employee who separates from service after age 50. For example, assume a New York City Police Officer retires at age 51 and elects to receive a $50,000 lump sum distribution from the NYC Police Pension Fund. If the NYC Police Officer decided to not rollover the $50,000 distribution, he would not be subject to the 10% early withdrawal penalty.
Both the 55 and 50 year old exemptions have an added twist. If the 55/50 year old taxpayer elects to rollover funds to an IRA/retirement plan then they would have to wait until 59 ½ years old in order to receive distributions without penalty. For example, assume the NYC police officer in the previous example instead elects to rollover the $50,000 distribution from the NYC Police Pension Fund to an IRA. Once the rollover funds are in the IRA, the NYC police officer would have to wait until 59 ½ years old to receive distributions without the penalty.
Note: This paper is not intended as tax advice. The determination of how the tax laws affect a taxpayer is dependent on the taxpayer’s particular situation. A taxpayer may be affected by exceptions to the general rules and by other laws not discussed here. Taxpayers are strongly encouraged to seek help from a competent tax professional for advice about the proper application of the laws to their situation.