age 55 and separated from service
If a client has been laid off and wants to leave his 401K balance at his previous employer so that he can withdraw a lump sum without the penalty, how long can he leave it there? Can he make more than one withdrawal before finally rolling over the remaining balance into a rollover IRA? Since he has been laid off, he wants to take a lump sum now until he finds another job, but doesn’t want to close the door on future withdrawals if it takes awhile to find a new job. Is this possible, or does he have only one chance to withdraw without the 10% penalty?
Thank you.
Permalink Submitted by Alan Spross on Tue, 2009-03-17 20:48
This depends totally on what provisions the plan contains for flexible withdrawals after separation. A single lump sum to fund a client’s expenses until age 59.5 could inflate his tax bracket high enough so that the tax damage would be worse than rolling it to an IRA and paying his lower bracket plus 10% early withdrawal. Some plans may offer installments with an annual reset of the amount, or in the best situtations simply allow the amounts needed per request. This is the best option, since the withdrawals can stop if the client gets another job. The client needs to check with the plan administrator and/or SPD to determine what options are available.
It is best to fully check into this. Many client’s roll over their plan to an IRA, and end up having to set up a 72t plan, and these plans are very rigid and must last at least 5 years or until 59.5, whichever is longer. If not done exactly according to IRS rules, a retroactive penalty plus interest on all distributions is levied.
Permalink Submitted by Kathy Patterson on Wed, 2009-03-18 20:05
Thank you. What does SPD stand for?
Permalink Submitted by Alan Spross on Wed, 2009-03-18 20:26
Summary Plan Description. See attached:
http://www.401khelpcenter.com/401k_education/SPD.html