Active Duty National Guard Members Receive Tax Break on Early Retirement Account Withdrawals: Benefits Alerts: Hitesman & Wold, P.A. News & Events


October 27, 2006

Active Duty National Guard Members Receive Tax Break on Early Retirement Account Withdrawals

Early Withdrawal Penalties. A taxpayer who withdraws money from a qualified retirement plan before age 59½, death, or disability generally is subject to a 10-percent early withdrawal tax on the amount includible in income, unless an exception to the tax applies. Among other exceptions, the early distribution tax does not apply to distributions made to an employee who separates from service after age 55, nor does the tax apply to distributions that are part of a series of substantially equal periodic payments made for the life of the employee or the joint lives of the employee and his or her beneficiary.

New Exception. As part of the Pension Protection Act (“PPA”) signed earlier this year, early withdrawal penalties on distributions from a qualified retirement plan are waived for members of the National Guard if the withdrawal is made while they are called to active duty. An individual must be called to active duty for a period in excess of 179 days. The withdrawn amounts may be repaid within two years regardless of the annual contribution limit. However, repayment is not required. If the requirements of the new provision are met, the withdrawals will not be subject to the 10% early withdrawal penalty. Applicable capital gains tax would still apply.

Note: The new exception applies to 401(k) plans, 403(b) plans, and IRAs.

Effective Date. The provision applies to withdrawals made by active duty National Guard members that occurred after September 11, 2001. This exception lasts through December 31, 2007. A refund or credit of any overpayment of tax resulting from the new provision may be made.

If you would like more information on this new provision, please contact our office.