Public Safety Worker
10% Penalty Early Distribution Exception
You are considered a “Public Safety Worker,” and eligible for the 10% penalty early distribution exception if you work in one of the following positions:
- State and Local Police
- Firemen and EMS Workers
- Federal Public Safety Workers such as Federal Law Enforcement Officers (FDLEO) and Federal Firefighters
- Air Traffic Controllers
- Border Protection Officers
- Certain Customs Officials
The Public Safety Worker 10 percent early distribution exception applies to every dollar withdrawn from your retirement plan account over and above the normal federal income taxes due to the Trade Priorities & Accountabilities Act of 2015 and the Secure Act 2.0.
Understanding the 10% Early Withdrawal Penalty
The IRS normally charges a 10% penalty if you withdraw money from a retirement account before age 59½. However, public safety workers may avoid this penalty under certain conditions.
You may qualify if you:
- Leave service after age 50, or
- Complete 25 years of service at any age
These rules apply to eligible public safety job categories.
How is that you ask?
The answer is within the “Trade Priorities and Accountability Act of 2015 and the Secure Act 2.0. There is a retirement plan distribution provision in that legislation that creates a provision that directly affects the distribution penalty for Public Safety Workers. It actually allows much greater flexibility with retirement planning and income distribution planning.
The exception ONLY applies to company sponsored retirement plan distributions. If you roll your plan over to an IRA then the early distribution penalty would be negated and would be applicable since the withdrawal would no longer be distributed from the employer’s plan.
So, just what is in this act from 2015 and how does it help “Public Safety Workers” with their retirement income planning?
TYPES OF RETIREMENT PLAN ACCOUNTS AFFECTED
The Act extends the types of plans which can be distributed from. Previously only defined benefit plan distributions were eligible. The 10% early distribution penalty waiver now applies to defined contribution plans like your 401k or 457 plan.
The Act’s retirement plan distribution allowances went into effect for distributions after calendar year 2015. Also note that it applies to the distribution date and is not based on the actual date of separation from service, as those could be different. The act specifically states that separation from employment must be after attaining the age of 50. The Secure Act 2.0 further goes on to specify any age after 25 years of service.
Financial advisors, CPA’s, tax attorney’s and other sources of professional financial advisory often explore another provision with the tax code known as IRC Section 72(T). This tax code which has existed well before 2015 also allowed for penalty free avoidance of the added 10%, but requires the distributions to be taken based on a life expectancy distribution projection and had to be taken for a minimum of (5) five straight years or until the participant reached the age of 59 and 1/2; whichever is reached first.
The good news is these two tax codes are mutually exclusive and can be used in conjunction with one another creating flexibility for the retiree in designing their income stream.
WHAT DOES THIS MEAN FOR YOU? AND WHAT DO YOU DO WITH THIS NEW FOUND INFORMATION?
If you are considered a Public Safety Worker, you have more options than ever before in designing an early retirement income stream. Saving 10% in IRS penalties can go a long way towards lasting your nest egg.
It’s key to make sure you understand the rules. The biggest rule you must be aware of is this 10% penalty earl distribution exception only applies to distributions from your employer sponsored retirement plan(s). Rolling your retirement over into an IRA will eliminate the flexibility to take advantage of this provision. The other concern is, are you saving enough to early withdrawal in the first place? That consideration has far more reaching computations and should require the eyes of a financial professional. Things like lifestyle, health history, family genetics all present a (life expectancy) computation to be taken into consideration which is applied to a standard of living budget with inflation also taken into consideration. All of that is applied before a sequence of returns calculation is performed all in an effort to project a sustainable lifetime income stream.
FAQ
What is the Public Safety Worker early distribution exception?
The Public Safety Worker early distribution exception allows eligible public safety employees to withdraw money from certain retirement plans before age 59½ without paying the 10% early withdrawal penalty.
Who qualifies as a public safety worker for the 10% penalty exception?
Public safety workers include police officers, firefighters, EMS personnel, federal law enforcement officers, federal firefighters, air traffic controllers, border protection officers, and certain customs officials.
At what age can public safety workers withdraw retirement funds without the 10% penalty?
Eligible public safety workers can withdraw retirement funds without the 10% penalty if they separate from service after age 50 or after completing 25 years of service at any age.
Does the 10% penalty exception apply to IRA accounts?
No. The early distribution exception applies only to employer-sponsored retirement plans such as 401(k) or 457 plans. If you roll the funds into an IRA, the penalty exception usually no longer applies.
Which retirement plans qualify for the public safety worker exception?
The exception applies to employer-sponsored retirement plans such as 401(k) plans, 457 plans, and certain defined contribution plans.
What laws created the public safety worker early withdrawal exception?
The exception was created under the Trade Priorities and Accountability Act of 2015 and expanded under SECURE Act 2.0.
Can public safety workers use IRC Section 72(t) instead?
Yes. Public safety workers may use IRC Section 72(t) to avoid the 10% penalty. However, this method requires scheduled withdrawals based on life expectancy and must continue for at least five years or until age 59½.
Can public safety workers combine the early withdrawal exception with other retirement strategies?
Yes. In some cases, financial advisors may combine the public safety worker exception with other tax strategies to create a flexible retirement income plan.
Why is financial planning important for early retirement withdrawals?
Early withdrawals affect long-term retirement savings. A financial professional can help plan withdrawals, manage taxes, and create a sustainable income strategy.
