Age 55 Rule

Q. Suppose you have a 403(b) client who left the current employer at age 52. He is now age 55 and wants to take withdrawals from the 403(b) account because he believes he would not incur the IRS 10% penalty tax on those withdrawals. Is he correct?

A. No, he is not correct! The “age 55 rule” found in Internal Revenue Code Section 72(t) specifies that the 10% 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 prior to 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.