age 55 separation from service – 10% penalty
Interesting question that was recently posed.
Client is turning 55 in 2015 – plans on retiring later in the year. Client intends on cashing out a portion of his 401(k) avoiding the 10% penalty with remainder rolled to an IRA. Simple enough.
Question
Client has 401(k) accounts from previous employers. Can he roll the old 401(k) accounts to the current employer’s 401(k) and subsequently cash out (upon retirement) avoiding the 10% penalty. Seems like this is allowable. Confirmation needed.
Thank you
Permalink Submitted by Alan - IRA critic on Thu, 2015-03-26 15:13
Yes, he could roll either another 401k or an IRA into the plan and attain the age 55 separation exception for the entire balance. There is no restriction on this in the code. Hopefully, he would not be draining too much of his retirement plan balance. This exception is often used to avoid starting an inflexible 72t plan, however he should check to determine how flexible his distributions can be from the 401k. Some plans require a lump sum distribution, and if he had to distribute enough to last until 59.5, the spike in his tax bracket in a single year might offset the benefit of the penalty waiver.