Category: Individuals; Compensation & Employee Benefits
Subject: Individual Retirement Account Withdrawal
Title: Applicability of Section 72(t) to Distributions from IRA Rolled Over from Qualified Plan on Death of Participant
IRC Sections: 72(t)
Filename: 1166.html
Date Produced: 8/96

Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com

Background
Taxpayer is recently deceased. At the time of his death, he was a participant in a Keogh plan. On his death, the balance of the plan went to his wife as designated beneficiary under the plan. Wife plans to roll the distribution into an IRA and begin drawing against the IRA money to meet current living expenses. Wife has not yet attained the age of 59-1/2.

Issue
Are the withdrawals by the wife subject to the early distribution penalty under Section 72(t)?

Answer
While the matter is not free from doubt, it appears there may be a filing position that the early distribution penalty does not apply in this case. I strongly urge that the taxpayer seek a private letter ruling on this issue.

Discussion
IRC Section 72(t) imposes a 10% penalty for early withdrawals from qualified plan or Individual Retirement Account. IRC Section 72(t)(2)(A)(ii) provides an exception for withdrawals made by reason of the employee's death. On the surface, it appears that this exception does not apply to this case because the IRA is the recipient of the distribution on account of the employee's death. There appears to be no protection for the spouse with respect to the subsequent distributions.

I cannot locate anything that can be cited as precedent to indicate to the contrary. However, there are two private letter rulings that reach the result that IRA withdrawals prior to the surviving spouse's having attained the age of 59-1/2 are not subject to the 10% early withdrawal penalty under Section 72(t). The rulings in question are PLR 9608042 and PLR 9418034. I have attached the text of the former ruling for your convenience.

Please call me when you have digested all this. I think we should get a qualified plan specialist involved to either get a letter ruling or endorse the reasoning set forth in the existing rulings.