When do Tax Penalties Come into Play?

Once you retire, you can withdraw some or all of your SIS Pension money without being subject to a tax penalty. This is also true for Disability withdrawals.

It is a common misunderstanding that you can’t get some or even all of your SIS Pension money before you reach age 59 ½ without being subject to a tax penalty. This misunderstanding probably comes from common knowledge of how Individual Retirement Accounts and 401(k) plans work. The SIS Pension Plan is a type of pension plan where so long as you withdraw under the Retirement or Disability rules of the plan, you will not be subject to a tax penalty. So, if you are under 59 ½, and you are retired or disabled, you can withdraw all or a part of your SIS Pension money and you will only owe regular income taxes on the portion you withdraw from the plan and do not roll into an Individual Retirement Account (IRA).

If you are under 59 ½ and you withdraw some or all of your money under the Separation of Employment provision of the SIS Pension Plan, and you do not shelter that money in an IRA by direct “trustee to trustee” transfer or by rolling over that money within 60 days of receipt, you will be subject to a 10% excise tax in addition to owing regular taxes on your whole withdrawal.

If you withdraw your SIS Pension Fund money as a retirement benefit and roll it into an IRA, you will then be subject to IRA tax rules and may incur a 10% tax penalty if you withdraw before age 59 ½. However, everyone can withdraw from IRAs before age 59 ½ without suffering a tax penalty by taking advantage of one of the exceptions. The key to avoiding tax penalties on IRA withdrawal before 59 ½ is “Substantially Equal Periodic Payments” also known as “SEPP”. A SEPP is one of the exceptions in the IRS Code that allows people to receive payments from an IRA without tax penalty. Any bank or investment firm that offers IRAs can explain how a SEPP can work for you.

Internal Links

Back to Planning for Retirement

External Links

Investopedia – SEPP – Substantially Equal Periodic Payments