Author Topic: 59 1/2 Question  (Read 9290 times)

TheContinentalOp

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59 1/2 Question
« on: April 14, 2015, 02:28:08 PM »
Is 59.5 just shorthand for the year in which you turn 59.5? It seems to me it would be a record-keeping nightmare if it weren't. And in other cases, catch-up contributions for example), it's the year in which you reach the specified age, not then you reach the actual age.

This is of particular interest to me, as my birthday is in late June, so the I will just slightly over 58.5 on January 1st of the year when I turn 59.5

frugalnacho

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Re: 59 1/2 Question
« Reply #1 on: April 14, 2015, 02:33:13 PM »
I think it's literal.  You will be 59 1/2 in late december.  You can access accounts after that date.  How would it be a record keeping nightmare?  You were born on a certain date, and exactly 59 1/2 years after that you can access certain accounts.

MDM

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Re: 59 1/2 Question
« Reply #2 on: April 14, 2015, 03:24:43 PM »
"...on or after the date on which the taxpayer attains age 591/2."

See https://www.law.cornell.edu/uscode/text/26/72

Nothlit

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Re: 59 1/2 Question
« Reply #3 on: April 14, 2015, 03:43:54 PM »
I think it's literal.  You will be 59 1/2 in late december.  You can access accounts after that date.  How would it be a record keeping nightmare?  You were born on a certain date, and exactly 59 1/2 years after that you can access certain accounts.

I've never looked into it, but is "half a year" defined anywhere in law? Is it 182 days (183 if it's a leap year)? Is it 6 months? Is it 26 weeks? None of those seems particularly precise, and which one you choose could lead to different dates.

If it's defined as 6 months later, that leads to some wonky math: someone born on February 28 turns 59.5 on August 28, but someone born on March 1 turns 59.5 on September 1. That seems unfair to the person born 1 day later who has to wait 3 extra days. :) Conversely, anyone born on August 29, 30, 31, or September 1 must all turn 59.5 on the same day: March 1 (ignoring leap years).

Cheddar Stacker

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Re: 59 1/2 Question
« Reply #4 on: April 14, 2015, 04:46:13 PM »
Same as marriage, it's your status on 12/31/xx.

Go curry cracker mentioned it in one of his many recent tax posts. Go check that out if you haven't.

MDM

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Re: 59 1/2 Question
« Reply #5 on: April 14, 2015, 05:02:17 PM »
Same as marriage, it's your status on 12/31/xx.

Go curry cracker mentioned it in one of his many recent tax posts. Go check that out if you haven't.

Hmm...if I were the OP I might believe the tax law instead of a internet blog post (despite GoCurryCracker's generally excellent advice).  See http://forum.mrmoneymustache.com/welcome-to-the-forum/59-12-question/msg627329/#msg627329 - unless there is an overriding tax law?

Cheddar Stacker

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Re: 59 1/2 Question
« Reply #6 on: April 14, 2015, 06:01:12 PM »
Yeah, sorry about that, I didn't fully read the OP. I am just excited to be on the forum again and was shooting from the hip.

I thought OP was talking tax years for planning purposes, not for cash flow purposes. If you are born in the first half of the year you get an extra tax year for IRA withdrawals over the guy born in the 2nd half.

For cash flow, you can't take the distribution until 59.5. The recordkeeping is simple. Your 401k/ira provider has your b-day. They issue a 1099-r with the draw, and put a code on it (1 for example). Then the tax code uses that code to determine what type of draw it was. Normal, early, early with exception, conversion to Roth, etc. Easy peasy.

Sorry for any confusion.

frugalnacho

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Re: 59 1/2 Question
« Reply #7 on: April 14, 2015, 11:00:00 PM »
I think it's literal.  You will be 59 1/2 in late december.  You can access accounts after that date.  How would it be a record keeping nightmare?  You were born on a certain date, and exactly 59 1/2 years after that you can access certain accounts.

I've never looked into it, but is "half a year" defined anywhere in law? Is it 182 days (183 if it's a leap year)? Is it 6 months? Is it 26 weeks? None of those seems particularly precise, and which one you choose could lead to different dates.

If it's defined as 6 months later, that leads to some wonky math: someone born on February 28 turns 59.5 on August 28, but someone born on March 1 turns 59.5 on September 1. That seems unfair to the person born 1 day later who has to wait 3 extra days. :) Conversely, anyone born on August 29, 30, 31, or September 1 must all turn 59.5 on the same day: March 1 (ignoring leap years).

That's a good question.  I don't know.  It just says 59 1/2.  I can't seem to find the answer.

"...on or after the date on which the taxpayer attains age 591/2."

See https://www.law.cornell.edu/uscode/text/26/72

Is it just me or does it not specify how to come up with that half year?  Is it 6 months? 182.5 days?  I have been searching for about an hour know, and honestly I am more confused than when I started.  Surely the IRS must address exactly how to determine your age for the 59 1/2 rule. 

Cathy

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Re: 59 1/2 Question
« Reply #8 on: April 15, 2015, 11:50:31 AM »
"...on or after the date on which the taxpayer attains age 591/2."

See https://www.law.cornell.edu/uscode/text/26/72

The part you quoted is either from the rules for a distribution from an "annuity contract" (26 USC 72(q)(2)(A)) or from a "modified endowment contract" (26 USC 72(v)(2)(A)).

The OP did not specify what he was asking about, but for a "qualified retirement plan", the relevant language is almost identical and is found in 26 USC 72(t)(2)(A)(i), which provides that the 10% "additional tax" does not apply to distributions which are "made on or after the date on which the employee attains age 59 1/2". 26 USC 72(t)(5) says that in the case of an IRA, the word "employee" includes any participant in the plan and includes the beneficiary of the IRA.

The statutory language here is very clear with respect to the relevant time being the time the distribution is taken, not the end of the year.

That said, I would think that the language is pretty much just as clear in 26 USC 72(2)(A)(v), which provides that the additional tax does not apply to a distribution "made to an employee after separation from service after attainment of age 55". However, in Notice 87-13, Q&A-20 (apparently not available on the IRS website), the IRS asserted that the additional tax does not apply to a distribution made after separation from service if "such separation from service occurred during or after the calendar year in which the employee attained age 55" (emphasis mine).

It is important to understand that that the IRS does not have the power to override a statute even if the effect of doing so is favourable to taxpayers. If a stated taxpayer-friendly position in an IRS document is not legally defensible, the IRS is free to disavow it in assessing your return, or to take a different position in litigation before the courts.

Even assuming the interpretation asserted in Notice 87-13 is defensible, the two provisions do use slightly different language. 26 USC 72(t)(2)(A)(v) refers to "after attainment of age 55", whereas 26 USC 72(t)(2)(A)(i) and friends refer to "on or after the date on which the employee attains age 59 1/2". The latter appears even more explicit about the distribution having to be after "the date", not just in the relevant year. That said, the Notice 87-13 interpretation of "attainment of age 55" is honestly pretty strained itself, so I'm not sure anything turns on this slight difference in phrasing.

I am unable to locate any IRS advice on the meaning of "on or after the date on which the employee attains age 59 1/2", nor was I able to locate any court ruling which considered the meaning of the phrase.

In El v. Commissioner, 144 TC No 9, the Tax Court considered a highly technical issue with no direct relation to this topic. Briefly stated, the petitioner El alleged that the IRS could not assess the 10% "additional tax" to his qualified retirement plan distribution because the IRS had failed to point to any evidence that El was under age 59 1/2 at the time of the distribution. To be clear, El did not suggest that he was actually 59 1/2 or older. His contention was the total lack of evidence on that point acted to prevent the IRS from assessing the 10% "additional tax".

The Court observed that the record did indeed lack any evidence as to "petitioner's age on the date on which he received the ... distribution". So, you will note that the Court casually assumed that the relevant date is the date on which the taxpayer received the distribution. However, this casual observation was not relevant to the issue the Court was deciding and thus it is known as "dicta" and is not binding authority. When courts make statements on issues that are not fully briefed by the parties, they are prone to making an incorrect decision, which is part of the rationale of why these kind of statements are not authority in the same way as the actual decision is. That said, the statement is still in the opinion, and it's literally the only judicial consideration of the phrase that I can find.

As for the case, the IRS did not respond by parsing the age requirement. Rather, they responded with an even more technical argument. 26 USC 7491(c) says that the IRS has the burden of production on any factual issue with "respect to the liability of any individual for any penalty, addition to tax, or additional amount". That means that if the IRS does not produce any evidence necessary to impose a "penalty, addition to tax, or additional amount", then the amount cannot be imposed.

However, the IRS argued that the 10% "additional tax" imposed by 26 USC 72(t) was not a "penalty", "addition to tax", or "additional amount", but was rather an "additional tax", which according to the IRS is a quite different thing. The judge actually accepted that argument and therefore the lack of evidence on the taxpayer's age did not prevent the IRS from assessing the 10% tax.

Surely the IRS must address exactly how to determine your age for the 59 1/2 rule. 

As a general rule, government agencies are not required to issue guidance on the laws they administer.

As the Supreme Court of Canada has poignantly said in a completely unrelated context, "[i]ndividuals are ... expected to refrain from conduct that tests the boundaries of ... law lest they bear the consequences of the risk they have knowingly assumed": R. v. Levkovic, 2013 SCC 25, [2013] 2 SCR 204, at para 63.

Basically, you are free to test the edge cases of the law, but when you do so, you bear the risk that you may not be successful.
« Last Edit: April 15, 2015, 02:49:27 PM by Cathy »

MDM

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Re: 59 1/2 Question
« Reply #9 on: April 15, 2015, 12:22:26 PM »
The part you quoted is either from the rules for a distribution from an "annuity contract" (26 USC 72(q)(2)(A)) or from a "modified endowment contract" (26 USC 72(v)(2)(A)).

The OP did not specify what he was asking about, but for a "qualified retirement plan", the relevant language is almost identical and is found in 26 USC 72(t)(2)(A)(i), which provides that the 10% "additional tax" does not apply to distributions which are "made on or after the date on which the employee attains age 59 1/2".
Yep, missed the distinction between taxpayer vs. employee on the first read.  Searched for "59" and saw the "on or after the date" part was the same.  Actually looked for an occurrence of "59" with a space between that and the 1/2 but found none, so copied and pasted the first one into the post.  The 7 occurrences of 59 are below.  I don't think anyone could misinterpret the intent, but - just curious - what is the legal reason not to read the age as 295.5 years (591 divided by 2)?

on or after the date on which the taxpayer attains age 591/2
and after the taxpayer attains age 591/2
before the taxpayer attains age 591/2
on or after the date on which the employee attains age 591/2
after the employee attains age 591/2
before the employee attains age 591/2
on or after the date on which the taxpayer attains age 591/2

frugalnacho

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Re: 59 1/2 Question
« Reply #10 on: April 15, 2015, 12:26:51 PM »
Surely the IRS must address exactly how to determine your age for the 59 1/2 rule. 

As a general rule, government agencies are not required to issue guidance on the laws they administer.

As the Supreme Court of Canada has poignantly said in a completely unrelated context, "[i]ndividuals are ... expected to refrain from conduct that tests the boundaries of ... law lest they bear the consequences of the risk they have knowingly assumed": R. v. Levkovic, 2013 SCC 25, [2013] 2 SCR 204, at para 63.

Basically, you are free to test the edge cases of the law, but when you do so, you bear the risk that you may not be successful.

I don't understand.  I mean I understand that testing undefined or unclear boundaries means you bear risk of being wrong, but how is it possible that this specific boundary is undefined?  Surely this situation comes up thousands of times per year with people between the age of 59 and 60 taking distributions from an IRA.  When you take a distribution from an IRA it must be labeled as before 59 1/2 or after, you either pay a penalty or you don't, there is no middle ground, it MUST be classified one way or the other.  How is that line not clearly defined? 

Is the IRS free to interpret it however they see fit?  And even they are, and they interpret in some backwards and illogical way that doesn't make sense and isn't intuitive, how has this not already come up and been clearly defined?  They must at least be consistent.  The age I turn 59 1/2 has to be calculated the same way for every body.

Eric

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Re: 59 1/2 Question
« Reply #11 on: April 15, 2015, 12:30:39 PM »
You guys realize the difference between 6 months after your 59th birthday and 183 days after your birthday is a maximum difference of like 3 days, right?  So wait four days until you're 59.51096 years old and you're good to go.

frugalnacho

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Re: 59 1/2 Question
« Reply #12 on: April 15, 2015, 12:37:20 PM »
You guys realize the difference between 6 months after your 59th birthday and 183 days after your birthday is a maximum difference of like 3 days, right?  So wait four days until you're 59.51096 years old and you're good to go.

I agree it's probably a non issue if you just wait a few extra days, but I think this is missing the point.  At this point I want to know just to satisfy my curiosity.  I don't understand it and I like to understand things.

MDM

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Re: 59 1/2 Question
« Reply #13 on: April 15, 2015, 12:38:03 PM »
And even they are, and they interpret in some backwards and illogical way that doesn't make sense and isn't intuitive, how has this not already come up and been clearly defined?  They must at least be consistent.  The age I turn 59 1/2 has to be calculated the same way for every body.
Closest I could find is in https://www.law.cornell.edu/cfr/text/26/1.401%28a%29%289%29-2: "A-3. An employee attains age 701/2 as of the date six calendar months after the 70th anniversary of the employee's birth."


frugalnacho

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Re: 59 1/2 Question
« Reply #14 on: April 15, 2015, 12:44:10 PM »
And even they are, and they interpret in some backwards and illogical way that doesn't make sense and isn't intuitive, how has this not already come up and been clearly defined?  They must at least be consistent.  The age I turn 59 1/2 has to be calculated the same way for every body.
Closest I could find is in https://www.law.cornell.edu/cfr/text/26/1.401%28a%29%289%29-2: "A-3. An employee attains age 701/2 as of the date six calendar months after the 70th anniversary of the employee's birth."

That was also the closest I found, and probably most applicable given that they are both are in reference to IRA and 401k withdraws.  But I also found several laws that determine your age differently than that for other purposes, which confused me even more.  I won't bother posting all the laws I found because I didn't save them, and I don't think they are applicable, and some contradicted the laws in other areas of the federal code.   I think it's weird that they don't specify (or at least I can't find where they do specify, and no one else seems to either) on something which surely happens thousands of times per day across the USA. 

Cheddar Stacker

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Re: 59 1/2 Question
« Reply #15 on: April 15, 2015, 12:50:18 PM »
What's with the 1/2 fucking years anyway? Why not 60 and 70? Or even better 50 and 75?

frugalnacho

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Re: 59 1/2 Question
« Reply #16 on: April 15, 2015, 01:02:01 PM »
What's with the 1/2 fucking years anyway? Why not 60 and 70? Or even better 50 and 75?

Apparently because actuaries for the insurance industry round your age and use integer numbers.  So if your real age is 59.5 to 60.5 you are counted as being 60.  So when congress wants you to "retire" at 60, they use the same actuary tables so that you are "60" once you reach 59 1/2.  Or something like that.

Eric

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Re: 59 1/2 Question
« Reply #17 on: April 15, 2015, 01:22:27 PM »
You guys realize the difference between 6 months after your 59th birthday and 183 days after your birthday is a maximum difference of like 3 days, right?  So wait four days until you're 59.51096 years old and you're good to go.

I agree it's probably a non issue if you just wait a few extra days, but I think this is missing the point.  At this point I want to know just to satisfy my curiosity.  I don't understand it and I like to understand things.

I know.  I figured.  :)

#INTJ

Cathy

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Re: 59 1/2 Question
« Reply #18 on: April 15, 2015, 01:31:59 PM »
I don't think anyone could misinterpret the intent, but - just curious - what is the legal reason not to read the age as 295.5 years (591 divided by 2)?

on or after the date on which the taxpayer attains age 591/2
and after the taxpayer attains age 591/2
before the taxpayer attains age 591/2
on or after the date on which the employee attains age 591/2
after the employee attains age 591/2
before the employee attains age 591/2
on or after the date on which the taxpayer attains age 591/2

The "www.law.cornell.edu" website is an extremely useful resource, but it is not the actual law in a technical sense. The law consists of the bills enacted into law by Congress and signed by the President (except in cases where the President does not have to sign the bill).

In the case of the tax code, the Internal Revenue Code of 1954 ("IRC54") is the actual law, as amended from time to time by Congress. The original IRC54 did not contain 72(t).

In 1986, Congress passed the Tax Reform Act of 1986 ("TRA86"), which in 2 provided that the IRC54 may be thereafter cited as the Internal Revenue Code of 1986 ("IRC86"), and also, in 1123 (on page 388) inserted 72(t) into the IRC86/IRC54. To be clear then, there is no actual law passed by Congress that contains the entire current version of Title 26 of the US Code. The actual law consists of the IRC86 (which is just an alias for the IRC54) and then all of the other later laws passed by Congress which modified the IRC86 -- a whole bunch of different documents. Title 26 of the US Code contains a version of the IRC86 with all of the subsequent laws "applied" to it.

For a hypertechnical issue like this typographical rendering discrepancy, you have to look at the original law as passed by Congress, which in this case is the TRA86. If you look at page 388 of the PDF, you'll see that in the actual law it is clearly written as "59 ". That document is what controls from a legal perspective.

I don't understand.  I mean I understand that testing undefined or unclear boundaries means you bear risk of being wrong, but how is it possible that this specific boundary is undefined?  Surely this situation comes up thousands of times per year with people between the age of 59 and 60 taking distributions from an IRA.  When you take a distribution from an IRA it must be labeled as before 59 1/2 or after, you either pay a penalty or you don't, there is no middle ground, it MUST be classified one way or the other.  How is that line not clearly defined? 

Is the IRS free to interpret it however they see fit?  And even they are, and they interpret in some backwards and illogical way that doesn't make sense and isn't intuitive, how has this not already come up and been clearly defined?  They must at least be consistent.  The age I turn 59 1/2 has to be calculated the same way for every body.

According to the US Supreme Court in Mayo Foundation v. United States, 562 US ___ (2011), if the Secretary of the Treasury enacted a regulation that defined the meaning of "59 1/2", and if that regulation was "reasonable", then that definition would control the meaning in all cases prospectively, regardless of any past cases on the topic.

In the absence of any such regulation (and there is none), it falls to the courts to decide the meaning of the phrase, according a measure of deference to any agency interpretation. If you disagree with the IRS's assessment of your return, you can challenge it through the courts. Although the IRS strives to apply tax law equally to everybody, the failure of it to do so generally does not create any rights. In other words, if the IRS allowed your neighbour to take a distribution 75 days after he turned 59 without paying the 10% additional tax, that would not create an enforceable right for you to do the same.
« Last Edit: April 15, 2015, 07:38:04 PM by Cathy »

MDM

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Re: 59 1/2 Question
« Reply #19 on: April 15, 2015, 01:40:01 PM »
For a hypertechnical issue like this typographical rendering discrepancy, you have to look at the original law as passed by Congress, which in this case is the TRA86. If you look at page 388 of the PDF, you'll see that in the actual law it is clearly written as "59 ". That document is what controls from a legal perspective.

Thanks!