Tax — retirement accounts — penalties

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United States Court of Appeals For the Seventh Circuit

Civil

Tax — retirement accounts — penalties

Where, before reaching 59½, a taxpayer withdrew money from an individual retirement plan, rather than from his former employer’s plan, he must pay the 10% additional tax.

“Kim insists that this makes no sense. He could have taken the money from the law firm’s pension plan without the 10% additional tax; why should it matter that the money went from the law firm’s plan to an IRA before being withdrawn? The answer is that the Internal Revenue Code says that it matters, and Kim does not contend that §72(t)(3)(A) violates the Constitution. Many parts of the tax code are compromises, and all parts reflect the need for lines that can’t be deduced from first principles. Why can an employee withdraw money from an employer’s plan without the 10% addition at age 55 but not age 54? Why does the 10% additional tax apply to withdrawals at age 59 and 181 days, but not 59 and 183 days? These questions cannot be answered by logical analysis. The Code’s lines are arbitrary. The law firm’s pension plan put Kim to a choice between taking the money and moving part or all of it to an IRA. He chose to roll over the whole balance, because he did not want to pay any income tax immediately. The Code allowed Kim to extend the tax deferral at the cost of the 10% additional tax if he later took some of the money before age 59½.”

Affirmed.

11-3390 Kim v. CIR

Appeal from the United States Tax Court, Easterbrook, J.