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When the 10% Penalty Tax Applies

Q: A competitor is telling my client, who severed employment at age 56, that a 10% penalty tax will apply to withdrawals from his 403(b) account because he is not yet age 59½. He is showing my client Code Section 72(t) to prove his point. Is there additional guidance on this issue?

A: Yes, Notice 87-13, which the IRS issued in 1987, specifies that the severance can occur in the same year as the 55th birthday or later in order to escape the 10% penalty tax. Your client is free of the penalty tax regardless of how he chooses to make withdrawals from the 403(b) account.

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