Q. Suppose you have a client who is retiring from a 403(b) at 53 and turns 54 later in the tax year. Does the penalty tax would apply for just one year or longer if the client takes distributions from his/her 403(b)? Will the penalty apply to payments made after 59½?
A. The penalty will apply to all distributions. The waiver is for employees who terminate service after attaining age 55 (they can also turn 55 in the year of termination). In this case, they are age 54.
Once the taxpayer reaches the age of 59½, the 10% premature distribution penalty will not be assessed on any distributions after that date.