Early Distribution at age 55

[GTS1101]

My client retired from Chevron USA Inc at age 48 back in the year 2000. After retiring from Chevron USA Inc he went to work for Chevron Phillips Company which is totally separate and independent from Chevron USA Inc. He had a retirement plan with Chevron USA Inc. When he turned 55 someone told him he could take out the money and pay the tax but not be penalized because he had separated from Chevron USA Inc when he retired in the year 2000. The company put in distribution code 1 as early distribution and subject to the penalty.

From the Taxbook:

Exception to the penalty: "Distribution from a qualified retirement plan after the participant has separated from service after reaching age 55 (age 50 for qualified
public safety employees). "

Does the above mean you have retire after reaching age 55 and then take the money out without being subject to penalty or does it mean after your retire no matter what age, once you turn 55 you can take the money out without penalty?

Thanks!

[dyne]

My opinion is that once he reaches age 55, the 10% penalty does not apply.
Also if his distributions are substantially the same from year to year then he
could claim section 72(t) to eliminate the penalty. That is shown on form 5329,
Part 1, item 2 as a code 2. Does anyone know different?

[Gene V]

10% penalty


You have to be age 55 when separated from service in order to avoid the penalty.
If you separate from work before age 55, then you would have to wait until age 59 1/2
to avoid the penalty.

[dyne]

Thank You Gene V.

[New York Enrolled Agent]

Gene V is correct.

From IRS Notice 87-13 Q&A 20

A distribution to an employee from a qualified plan will be treated as within section 72(t)(2)(A)(v) if (i) it is made after the employee has separated from service for the employer maintaining the plan and (ii) such separation from service occurred during or after the calendar year in which the employee attained age 55.