The Internal Revenue Service has issued details on the process for military reservists called to active duty to receive payments from individual retirement accounts, 401(k) plans and 403(b) tax-sheltered annuities, without penalities.
The Pension Protection Act of 2006 eliminated the 10-percent early-distribution tax that normally applies to most retirement distributions received before age 59½. The new law provides the relief to reservists called to active duty for at least 180 days or for an indefinite period.
Eligible reservists activated after Sept. 11, 2001, and before Dec. 31, 2007, qualify for the relief, though regular income taxes continue to apply to the payments in most cases.
The agency said that because the relief is retroactive, 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. Eligible reservists should write the words, "active duty reservist," at the top of the form. In “Part II: Explanation of Changes,” the reservist should write the date they were called to active duty, as well as the amount of the retirement distribution and the amount of early-distribution tax paid.
Reservists can choose to re-contribute part or all of the distributions into an IRA. Ordinarily, such 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 Aug. 17, 2006 (the date the pension law was enacted), they will have until Aug. 17, 2008, to make the contributions.
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