Expert: Allen - 8/25/2010

Question
After almost 36 years on the job, I left my employer in December of 2009 with a year's severance pay and retiree status. I turned age 58 this past April ( 2010 ). I reside in Maryland. In addition to my 401K with Fidelity through my former employer, I also have two pension funds there ... one under the former owner and one under the current owner. Both pensions are from employer-only contributions. I'm already clear on the fact that, since I was at least age 55 when I retired and since I didn't roll over my 401K, the law states that I can make withdrawals from it before age 59 1/2 without incurring the 10% early withdrawal penalty. My question concerns the law with regard to my pensions. My preference is lump sum distributions ( in separate tax years ), which the plans allow once my severance pay has expired. I'd assumed that I'd be able to do so without the 10% penalty, just like with my 401K. But a CPA told me that the 10% penalty will apply to a lump sum pension distribution prior to age 59 1/2 and he knows the circumstances of my severance from the company. This doesn't make sense to me. If I can do it with my 401K, then why not with my pensions? To be clear, I'm talking about the penalty, not ordinary income tax. Thank you in advance for any help and information that you can supply.

Answer
Please see corrected answer below:

Section 72(t)(2)(A)(v) of the Internal Revenue Code states that you can take penalty free distributions in lump sum form if you retire after age 55.

Ask the CPA to look at this section.

There still may be a problem. The trustees of the pension funds will be sending you and the IRS 1099R forms in January 2011. They need to be coded to show that the penalty does not apply.