Q. I have a 403(b) client who left the current employer at age 52. He is now age 55, and would like to take withdrawals from the 403(b) account because he believes he would not incur the IRS 10 percent penalty tax on those withdrawals. Is he correct?
A. No, he is not correct! The “age 55 rule” found in Code Section 72(t) specifies that the 10 percent penalty tax will not apply to participants who take withdrawals following severance of employment in the same year as attainment of the 55th birthday (or later). Since he left before the year in which he reached age 55, he would now have to wait until age 59½ to receive penalty-free withdrawals — OR, he would utilize the “substantially equal payments” option where he could receive income based on specific life expectancy calculations. That income would be free of the penalty tax as long as he continues to receive it without substantial modification for the longer of five years, or attainment of age 59½.