11.6 Penalty Taxes

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

11.6 Penalty Taxes

There are two tax penalties that can have an effect on a participant in a retirement plan. The practitioner must be aware of these penalties because they must be considered in making decisions about the distribution of benefits during lifetime or at death. The taxes are a penalty (1) on premature distributions and are (2) due to the failure to make required minimum withdrawals from the plan.

11.61 Premature Distributions

Any distribution from a qualified retirement plan, 401(k), IRA, or SEP before the participant reaches 59-1/2 years of age is subject to a 10% premature distribution penalty.⁴⁰ The distribution also is subject to income tax. The tax does not apply if the distribution is made owing to the participant's death, disability, divorce, if pursuant to a qualified domestic relations order, or for medical expenses that exceed the 72% of adjusted gross income floor.⁴¹ The distribution also is not subject to the 10% penalty if made to the participant after age 55 pursuant to early retirement, or earlier if made in equal periodic payments over the life expectancy of the participant or the participant and his or her beneficiary. Payments for medical expenses also are excluded.⁴² Further, most distributions from qualified...