10% early distribution penalty restrictions reduced for public safety workers

The Trade Priorities and Accountability Act of 2015 may shock you. Why? Because there’s a retirement plan distribution provision in a “trade” act. The new provision directly affects the distribution penalty for public safety workers. It actually allows them much greater flexibility with retirement planning and income.

Normally if you retire prior to age 59 and 1/2 you you’ll pay a 10% early distribution penalty on retirement account withdrawals. Current law provides an exception to the 10% penalty for individuals who terminate service after age 55.

The exception ONLY applies to company retirement plan distributions. If you roll your plan over to an IRA the early distribution penalty is still applicable. So just what’s in the new law and how does it help public safety workers retirement income planning?

 

Early distribution penalty exceptions

10% early distribution penalty lessened for public safety workers

The 10% premature penalty is waived for public safety workers like firefighters and police after age 50 now.

First off let’s cover just who this new rule applies to. The Act actually broadened the definition of “public safety workers”.

Public safety workers include:

  • state and local police,
  • firemen and EMS workers
  • federal public safety workers such as federal law enforcement officers and federal firefighters
  • air traffic controllers
  • border protection officers
  • certain customs officials

 

Public safety workers who retire after age 50 are exempt from the 10% early distribution penalty. This rule previously only applied to their government sponsored defined benefit pension plans. The Act changes the types of accounts public safety workers can withdraw from as well.

 

Types of retirement plan accounts affected

The Act extends the types of plans which can be distributed from. Previously only defined benefit plan distributions were eligible. The 10% early distribution penalty waiver now applies to defined contribution plans like your 401k or 457 plan.

The Act’s retirement plan distribution allowances go into effect for distributions AFTER 2015. Any distributions in calendar year 2015 are still subject to laws currently on the books. This 2016 requirement only applies to the actual distribution, NOT the actual separation of service date.

Essentially you could have retired at age 51 three years ago and your retirement plan distributions next year will enjoy the new allowances under the Act. Separation of service MUST have taken place after age 50 however.

 

Early distribution penalties and 72t distributions

The new loosened penalty provisions can be used in conjunction with rule 72t distributions. 72t distributions are an IRS provision which helps pre 59 and 1/2 retirees a waiver of the 10% early distribution penalty. The catch is they must schedule their distributions for a minimum of 5 years OR until they reach age 59 and 1/2.

The new 10% early distribution penalty waiver is mutually exclusive from the standard 72t distributions. Public safety workers can implement both waivers for their retirement income strategy.

 

What does this mean for you?

If you fall into the new broader category of a public safety worker, you have more options than ever before to create an early retirement income stream. Saving 10% in IRS penalties can go a long way towards boosting your retirement plan.

It’s key to make sure you understand the rules. The biggest rule you must be aware of is this 10% penalty waiver only applies to distributions from your work sponsored retirement plan. Rolling your retirement over into an IRA will eliminate the flexibility to take advantage of this provision.