Q: A competitor insists that my client's withdrawals from her 403(b) account are subject to the 10% premature distribution penalty tax. The client attained age 55 two months after she had severed employment from the school district for which she had worked. Would the penalty tax be imposed on her withdrawals?
A: No. IRS Notice 89-13 specifically says that, if severance of employment occurs in the same year as the 55th birthday, there is no applicable 10% penalty tax.