401K ROLLED INTO IRA AGE 55 EXCEPTION

[MOBEE]

Taxpayer current age 57 lost his job..has been unemployed for several years. He rolled over his 401k into an IRA in 2009. His unemployment has run out so he withdrew money from his IRA to live on. If I am reading correctly, because he is over 55 if the funds had been withdrawn from his 401K exception 1 would apply and he would not owe the 10% penalty... but because he rolled it over into an IRA that exception no longer applies since that rule does not apply to IRA's What are your thoughts. Doesn't seem fair if this is true..

[jasdlm]

The exception doesn't apply. Sorry.

[pikester1967]

No exception. Hopefully the following helps.

There is no financial hardship exception to the 10% early withdrawal penalty (Sheikh; Gallagher). Thus, retirement plan distributions used to meet normal living expenses following a job loss or pay cut are subject to income tax and penalty, unless the distribution meets one of the specified exceptions. The only exceptions are those discussed.

Certain transactions, such as borrowing from an IRA or pledging IRA assets as security for a loan, will trigger a deemed distribution (and thus income recognition) of that portion of the IRA balance borrowed or used to secure the loan [IRC Sec. 408(e)(3) and (4)]. Such deemed distributions can also give rise to the 10% tax on early distributions. Furthermore, investing IRA funds in certain types of collectibles (e.g., art, rugs, antiques, gems, stamps, certain coins—see Key Issue 7A) results in a deemed distribution of the cost of the investment and results in the 10% tax [IRC Sec. 408(m)]. The 10% tax also applies to early distributions (before age 59¹/2) from modified endowment contracts (more commonly known as single premium life insurance policies) and tax-deferred annuities [IRC Sec. 72(q) and (v)]. (See Key Issue 34C for more on tax-deferred annuities.)

[michaelmars]

is he paying cobra? you might make the medical exception

[MOBEE]

I will check on the COBRA. Thanks for the input. Just hoped there was a way to help this guy out.