Age 59.5 is a milestone in one’s life because it’s the age when withdrawals of pre-tax Defined Contribution (DC) assets are no longer subject to the 10-percent Federal penalty tax. This rule applies to 401(k)/403(b) and IRA assets.
Note: Regardless of age, withdrawals of 457(b) assets are never subject to the 10-percent tax. 457(b) assets, however, may only be withdrawn upon severance of employment.
59.5 is also an important age at the New York State income tax level. Prior to 59.5, withdrawals of 457(b)/401(k)/403(b) and IRA assets are fully taxable by the State of New York. After age 59.5, the taxpayer must pay state income tax only on that portion of a withdrawal that exceeds $20,000.
This is referred to as the $20,000 income exclusion. Example: Withdrawal is $30,000. Exclude $20,000. $10,000 is taxable.
With that said, age 59.5 is only the first of two requirements that must be met in order to qualify for the $20,000 income exclusion. The withdrawal must also be a periodic payment, which is defined as a payment which is part of a series of payments for a period of two or more consecutive years but not beyond your life expectancy or the joint life expectancy of you and your beneficiary. To be assured that you qualify for the $20,000 income exclusion, you need to check off “periodic distribution” on the Plan’s Distribution Form.
Noteworthy: Both periodic and non-periodic payments from IRAs qualify for the $20,000 income exclusion, so you may want to consider first rolling over your DC plan account balance to an IRA and then proceed to make withdrawals from the IRA.
Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by phone at (732) 536-9472, or via email at firstname.lastname@example.org.
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