IRA early withdrawal exceptions?

[Black Bart]

Surely there must be something somewhere for my desperate code 1, box 7 client other than the usual suspects (7-1/2% meds, school, 1st house, disabled, etc.).

What about that exception for "over age 55 and separated from service" which goes as code 2 in box 7 for 401Ks? Can't that apply to IRAs?

[Gretel]

I had exactly the same scenario. Over 55 and separation from service does not apply to IRA's but maybe you can use the "substantial equal payments" exception. They need to stick with the payment for at least 3 years, I believe.

[Black Bart]

Thanks Gretel, but

I had exactly the same scenario. Over 55 and separation from service does not apply to IRA's but maybe you can use the "substantial equal payments" exception. They need to stick with the payment for at least 3 years, I believe.

I think I'm out of luck -- he already took the whole thing out in one large withdrawal.

Talking about 401Ks though, do you know if that "separation from service" exception only applies if they leave for involuntary reasons like a factory closing or getting laid off because business was slow, etc.? I have a client who's 55, but he just quit his job and I wonder if he would still qualify for a code 2 exception since it was his own choice to "separate from service."

[Gene V]

My understanding

The code just say separated from service after age 55, doesn’t matter
If firer, quit or laid off.

[New York Enrolled Agent]

I had exactly the same scenario. Over 55 and separation from service does not apply to IRA's but maybe you can use the "substantial equal payments" exception. They need to stick with the payment for at least 3 years, I believe.

Actually, they must take the payments for at least 5 years and attain age 59½. Need both not just one of these conditions.

[JohnH]

You might want to double-check the age 59 1/2 part of your reply. If they're over 59 1/2 there's no penalty to be concerned about in the first place..

The Substantial Equal Payments provision (Section 72t) can be used at any age to avoid the early withdrawal penalty when periodic withdrawals are set up PRIOR TO age 59 1/2. . They must keep the SEPP plan in place for at least 5 years and the annual calculations must be exact - ballpark won't cut it. Any deviation from the plan (no matter how minor), will potentially blow the plan and trigger a recapture of the penalty on withdrawals for all prior years.

[Black Bart]

Say there N Y E A

Just double checking, but do you -- as a "Bees-class" poster -- have an opinion as to the eligibility for a code 2 for my guy who quit instead of being laid off?

[Gretel]

I agree.

I just learned something new about what can happen if TP takes distributions using this exception and then doesn't wait the required 5 years before changing amount of distributions.
She took distributions using this exception and received 1099-R code 2 until this year.

2008 distribution amount was reduced some months before 5 year waiting period was up (fault of investment company but they yelled at me and were ready to fight the IRS about it) and received 2 1099-R's, one with code 7 and a larger one with code 1.

Investment co. tells them no penalty applies. Going back to previous paragraph. Well, I finally printed the instructions for 1099-R and TP began to see what happened and will probably yell at investment co. now.

[New York Enrolled Agent]

You might want to double-check the age 59 1/2 part of your reply. If they're over 59 1/2 there's no penalty to be concerned about in the first place..

The Substantial Equal Payments provision (Section 72t) can be used at any age to avoid the early withdrawal penalty when periodic withdrawals are set up PRIOR TO age 59 1/2. . They must keep the SEPP plan in place for at least 5 years and the annual calculations must be exact - ballpark won't cut it. Any deviation from the plan (no matter how minor), will potentially blow the plan and trigger a recapture of the penalty on withdrawals for all prior years.

I suggest a read of §72(t)(4). The distributions must continue for the longer of 5 years or until the taxpayer reaches 59½.

[S T]

Another Issue

I have had a few of these and some of the banks and investment companies, do not have the provision in their system to issue a code 2 on the 1099R forms. They perfectly understand the age 55 and series of periodic payments for a period of at least 5 years , but can not issue the form with code 2. Code 2 isn't even on one banks list per one bank's manager. The taxpayer requests a printout and the calculation from the bank each year, which follows the guidelines for the periodic payment rules.

Sandy

[New York Enrolled Agent]

Just double checking, but do you -- as a "Bees-class" poster -- have an opinion as to the eligibility for a code 2 for my guy who quit instead of being laid off?

Bart

There appear to be 2 questions evolving in these posts.

#1 The exception for separation from service and attaining age 55 is NOT for IRAs. §72(t)(3)(A) expressly says no.

#2 I don't think there is any restriction about why a taxpayer separated from service. IMO, you just have to be gone.

[Burke]

I agree with both statements. It does not matter why you separated from service. And it only applies to qualified pension plans (i.e, 401k's, etc).

[JohnH]

I suggest a read of §72(t)(4). The distributions must continue for the longer of 5 years or until the taxpayer reaches 59½.

OK. Got it.
I didn't interpret the "longer of" part as it should be.understood.
Thanks for the correction.