Federal public safety employees will receive a substantial investment tax break thanks to a law recently signed by President Obama.
On June 29, he approved the Defending Public Safety Employees’ Retirement Act.
The act exempts federal public safety workers such as law enforcement officers and firefighters from being forced to pay a 10 percent penalty to the IRS if they want to withdraw money from their government retirement plan, like the Thrift Savings Plan, before they reach the age of 59½.
That’s the IRS’ mandated “retirement age” in which most investors/retirees can avoid the penalty if they withdraw after that age.
The law represents a huge break for public safety workers, however, because some of them are forced by law to retire at age 57. Therefore, they would have to pay a penalty to cash out their retirement investments, even though they are in reality retired.
In addition, at age 50, federal law enforcement employees and firefighters are eligible to retire after 20 years of service; in effect, they would have to wait several years to withdrawal money from their Thrift Savings Plan or other government-sponsored retirement accounts to avoid the 10 percent early withdrawal penalty.
Since 2006, state and local public safety officers have been exempt from the early withdrawal penalty, according to Government Executive.
The act received overwhelming bipartisan support in Congress. Only five representatives in the House voted against it. It was supported by the Federal Law Enforcement Officers Association, American Federation of Government Employees, and other organizations.
The exemption protects distributions from the penalty beginning January 1, 2016.
Visit the IRS’ website for helpful information about the rules governing early withdrawals.
According to Congressional records, the bill “amends the Internal Revenue Code, with respect to the exemption from the 10% penalty tax on early distributions from a government retirement plan for qualified public safety employees who have reached age 50, to expand the exemption to include specified federal law enforcement officers, customs and border protection officers, federal firefighters, and air traffic controllers who similarly have reached age 50.”
It also “eliminates the restriction that only distributions from governmental plans that are defined benefit plans qualify for the exemption, thus allowing an exemption of distributions from defined contribution plans and other types of governmental plans. Additionally, early distributions are not treated as a modification of substantially equal payments for purposes of determining an increase in the penalty tax,” according to the text of the legislation.
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