403b rolled over to IRA Distribution penalty waiver??
I have a client who is 56 and wants to roll over her 403b accounts, she is retired. If we roll them into a Traditional IRA, can she still take money out penalty free? Thanks…
I have a client who is 56 and wants to roll over her 403b accounts, she is retired. If we roll them into a Traditional IRA, can she still take money out penalty free? Thanks…
Permalink Submitted by Jose Morales on Fri, 2012-09-07 16:13
Once the funds are in an IRA they are subject to all of the IRA rules. Any distribution prior to reaching age 59 1/2 would be considered a premature distribution and will be subject to tax plus a 10% penalty, unless an exception applies.
Permalink Submitted by Alan Spross on Fri, 2012-09-07 16:26
If she separated from service in the year she turned 55 or later, she can take distributions directly from the 403b without penalty (but not from an IRA without a 72t plan). She should check to see how flexible the distribution options are from the plan.
If they are not flexible, then the choice boils down to taking out the amount she needs until age 59.5 in perhaps a lump sum or doing a direct rollover to an IRA and starting a 72t plan. These plans are NOT flexible and generate less than 5% of the account balance in annual distributions. In her case, the plan would have to last 5 years and any error would result in retroactive penalty and interest on the distributions taken from the IRS prior to 59.5.
It would be best if the 403b allows distribution options better than a lump sum, since a 72t plan should be the last resort.