Military Reservists Get Relief From Early Distribution Tax
 
October 4, 2006
 
Maria D. Lumb- Washington

On September 28, 2006, in News Release IR-2006-152, the IRS issued welcome news for certain military reservists called into active duty from September 11, 2001, to December 31, 2007. Eligible reservists will either receive refunds for or be exempted from the 10 percent, early-withdrawal penalty on preretirement payments received from certain employee plans, including 401(k) plans, individual retirement accounts and 403(b) tax-sheltered annuities.

The reason for the news is that the recently enacted Pension Protection Act eliminates the 10 percent early-distribution tax that normally applies to most retirement distributions received before age 59-1/2. The new law provides this relief to reservists called to active duty for at least 180 days or for an indefinite period, after September 11, 2001, and before December 31, 2007. Regular income taxes continue to apply to these payments in most cases.

The News Release provides that eligible reservists who already paid the 10-percent tax can claim a refund by using Form 1040X to amend their return for the year in which the retirement distribution was received along with other specific requirements that must be included on the filing.

Reservists can choose to re-contribute part or all of these distributions to an IRA. Ordinarily, these special contributions must be made within two years after the reservist’s active-duty period ends. However, if the reservist’s active duty ended before August 17, 2006 (the date the new law was enacted), he or she will have until August 17, 2008, to make these special contributions. No deduction is available for these contributions.

For more information, e-mail Maria Lumb at maria.lumb@hklaw.com or call toll free, 1-888-688-8500.