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July 31, 2014

The Age 55 Exception Rule for Early Distribution Penalty Exception

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Generally, distributions that occur before the participant reaches age 59 ½ are subject to a 10% early distribution penalty, unless the participant qualifies for an exception. One of the exceptions is what is commonly referred to as the ‘age 55’ exception.

Under the age 55 exception, a distribution from a qualified plan or 403(b) plan is not subject to the 10% early distribution penalty, if the following applies:

1.The participant separates from service with the plan sponsor in the year he or she reaches age 55 or later, and

2.The distribution occurs after he or she separates from service with the plan sponsor

Note: Age 55 is reduced to age 50, if the distribution is from a governmental defined benefit planto a qualified public safety employee. For this purpose, a “qualified public safety employee” means any employee of a State or political subdivision of a State who provides police protection, firefighting services, or emergency medical services for any area within the jurisdiction of such State or political subdivision. 

Notes:

  • The age 55 exception does not apply to IRAs. Therefore, a participant who is eligible for this exception loses the eligibility if the amount is rolled over to an IRA
  • The payor knows that you qualify for the age 55 exception, they are required to input Code 2 in Box-7 of IRS Form 1099-R, when reporting an early distribution that qualifies for the age 55 exception

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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