restrictions by plan or IRS when taking money out of 401K
I have a client that is noticing his 401(k) allows distribution if 55 yrs or older and if not there will be the 10% penalty. when I attended the Ed Slott work shop I was given a chart that validates this information. so this must be IRS regulations. this client thinks this is too restrictive and peopel should be able to take their money out at an earlier age.
I think if this client did a partial trustee to trustee transfer they will not have to pay 10% penalty if not 55 yrs old.
Are there IRS rules that provide better or more options for accessing this money earlier than age 55?
Permalink Submitted by Alan Spross on Fri, 2009-01-30 23:39
No, access to the funds are under the provisions of the plan document. But if the plan does allow in service distributions, a direct rollover will be tax and penalty free. Most 401k plans do not allow in service distributions as young as age 55.
With respect to the 10% penalty, the waiver at age 55 only applies to separation from service distributions, not to in service distributions. Therefore, a client still working should do a direct rollover to avoid tax and penalty if the plan allows it.
The only provisions to take distributions under age 55 are either plan loans or hardship distributions, and the hardship distributions are subject to tax and penalty if under age 59.5.
Permalink Submitted by Martin Helmer on Sat, 2009-01-31 00:51
There are 2 sets of IRS rules. One set applies to funds attributable to the employee’s elective deferrals. The other set applies to funds contributed by the employer, such as profit sharing and matching. The rules applicable to employer money are more liberal. It’s possible to allow an inservice distribution if either the employee has been a plan participant for 5 years or if the dollars in question have been in the plan for 2 years. These are optional plan provisions and the great majority of plans do not allow for these types of distributions.
On the other hand, money attributable to the employee’s elective deferrals by law cannot be distributed until one of a handful of specified events occurs–attainment of age 59 1/2, severance from employment, death, disability, certain terminations of the plan, and hardship. The plan need not allow for ANY of the preceding (except perhaps death); it could instead for example provide for distributions only upon attainment of the plan’s defined retirement age, e.g. 65. In practice, most plans allow a distribution upon severance of employment or separation from service.