Q: You have a client who is retiring from a public school district in June; however, he has an agreement to return to work with the same employer to do a special project for them. It is likely he will return to work in November. Since he is age 55, can he make withdrawals between June and November without the 10% IRS premature distribution penalty tax being imposed?
A: The IRS has said, on many occasions, that whether an employee has severed employment is a “facts and circumstances” situation. However, they have also said that an individual who “retires” and has an understanding that he or she is to return to work for the employer within a few months, would be assessed the 10% penalty tax for interim withdrawals unless they are age 59½.