Elimination of Early Withdrawal between 55 & 59 1/2
Here is a question I received from a person on my blog.
I have read in “Suze Orman’s 2009 Action Plan” book, that if you are laid off and are between 55 and 591/2 you are exempt from the federal 10% penalty if you withdraw from your retirement account. While watching TV on various programs, I haven’t heard anyone mention this exemption.
Can you find out more about?
See page 60 of Suze O’s book.
If this is correct, how do you notify the federal government of this status?
Can anyone help me out on this one?
I thought that the ability to withdrawal from a retirement plan in this way was unique to the plan document of the employer. She may also be talking about a 72t distribution but I understand that that does not have fall in between age 55 or 59 1/2. That is based equal period payments and could start at anytime as long as the payment are equal periodic payments.
Thanks for your help. 😮
Permalink Submitted by mk foss on Fri, 2009-03-13 17:30
There are a number of possible rules that Suze could be referring to.
If you leave a job after 55, there is no 10% penalty related to distributions from the qualified plan of the employer that you just left. The 1099R form that you recieve from such a distribution will be coded so that IRS knows that no 10% penalty applies. Distributions from IRAs or other employer’s plans before 59 1/2 will still cause a 10% penalty.
Unemployed persons can withdraw money from retirement plans without the penalty if the funds are used to pay medical insurance premiums. That’s another possibility.
Permalink Submitted by Mark Matsumura on Fri, 2009-03-13 20:51
To this point. Anyone have suggestions if a person age 56, took a full distribution from the 401k plan but actually wanted to leave money in the plan to have liquidity. Anyway to reverse this, or some way to set it up so this person could still have access to money without a 10% penalty?
Permalink Submitted by Alan Spross on Fri, 2009-03-13 22:04
The usual solution to a distribution is to roll it over to an IRA. While the separation at 55 exception is lost once the funds are rolled over, there are 3 possible solutions for penalty free IRA distributions:
1) The most common is the 72t exception for substantially equal periodic payments. These payments must last for the longer of 5 years or until age 59.5 and must be calculated using one of 3 life expectancy methods approved by the IRS.
2) Tougher to do, but if taxpayer gets another job he may be able to roll IRA funds back into the new qualified plan if the plan accepts them. He would then have a large enough qualified plan balance such that if he separated again, he could take distributions directly from the plan.
3) There are other exceptions under Section 72t for IRA distributions without penalty, such as higher education, medical expenses over 7.5% of AGI, health insurance while collecting unemployment, etc.
With respect to any qualified plan, the benefit of penalty free distributions is compromised if the plan does not allow flexible distributions until 59.5. Having to take out a lump sum would result in higher marginal tax rates, and that would probably be at least as costly as the early withdrawal penalty.