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BrotherDave

Penalty-free Withdrawal

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If a person leaves the job after age 55 but before 59 1/2, doesn't have another job (old job was eliminated) but hasn't formally retired, can she withdraw money from the 403(b) penalty-free? What if she subsequently gets another job? In other words, what is the definition of "retire" in relation to a 403(b)?

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You can't get money out of a 403(b) unless you have a "distributable event." These events include death, disability, attainment of age 59-1/2 and severance of employment.

 

The first three of these events escapes the 10% premature distribution penalty. If you sever employment with the employer who maintains the 403(b) plan, that is a distributable event, but may have the 10% penalty associated with it.

 

Section 72(t)(2)(A)(v) of the Internal Revenue Code provides an exception to the 10% penalty if you separate from service during or after the year in which you attain age 55. It doesn't require retirement, only separation from service.

 

So, if you're covered by any type of employer sponsored plan other than a SEP or a SIMPLE, if you sever your employment with the sponsoring employer, you can take distributions without the 10% penalty regardless of whether you retire or get a job with another employer.

 

A couple of caveats are in order. First, the separation of service has to occur during or after the year in which age 55 is attained. If you sever employment and age 53, for example, and wait until age 55 to take distributions, they will be subject to the 10% penalty because the separation occured before age 55.

 

Second, this exception does not apply to IRAs, SEPs or SIMPLEs. It only applies to 403(b)s, 401(k)s, pension, profit sharing, thrift plans, etc.

 

Finally, the exception is applicable only to the federal premature distribution penalty. It does not waive any penalties that are imposed by product vendors. Also, check with your state tax authority to see if it waives any penalty that might be imposed on your state income tax return.

 

Hope this helps.

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