Welcome to Financial Advisor IQ

No-Penalty Early Distributions for (Some) Public-Sector Employees

July 15, 2015

A law passed at the end of last month, and going into effect in 2016, will lower the age threshold when public-safety employees — cops, firefighters and the like — can withdraw retirement benefits from certain plans without incurring extra tax, reports WealthManagement.com.

Taking an early distribution (that is, before reaching age 59½) usually incurs a 10% additional income tax, unless the withdrawal is made from an employer-sponsored plan upon retirement by an employee who retires at age 55 or older, according to the news site. State public-safety employees have a lower threshold, at age 50, but it only applies to withdrawals from defined-benefit plans. Under the changes in the Defending Public Safety Employees’ Retirement Act, signed June 29, state public-safety employees will also be able to withdraw early from defined-contribution plans with no penalties, WealthManagement.com writes.

The law will also cover some federal employees, none of whom had the early withdrawal allowances of the state employees. The new law will allow no-penalty withdrawals for several types of federal employees retiring after age 50, such as federal law enforcement, customs and border protection and air-traffic-control personnel, according to WealthManagement.com. All other employees will still face the 55-or-older threshold for early retirement, according to the news site.

Both state and federal employees will get one more benefit starting in 2016. They’ll be able to avoid the 10% tax while receiving substantially equal periodic payments and be able to change the amount of these payments after reaching age 50 — something they weren’t allowed to do previously, WealthManagement.com tells us.

By Alex Padalka
  • To read the WealthManagement.com article cited in this story, click here.