401k Plan Early Dist. without a penalty
A client (58 1/2) is retired and still has his 401k with his previous employer. He said that the plan provider told him that if he takes a distribution from the plan, there would be no penalty, but if he rolls it to an IRA and takes a dist. there could be a penalty. Any thoughts?? Thanks..
Permalink Submitted by Alan - IRA critic on Tue, 2016-01-05 21:40
That would be correct if the client retired from this company in the year that he reached 55 or later. In that case, the plan would code the 1099R reporting a distribution with exception code 2 instead of early distribution code 1. But if the plan balance is rolled to an IRA, the age 55 exception disappears and client must wait until 59.5 to eliminate the penalty. Many early retirees make the mistake of rolling over the 401k too soon and when they need IRA distributions, they are forced to set up a 72t (SEPP) plan to get the penalty waived. These plans are risky and rigid and should be avoided unless there is no alternative. The key question in this case is whether his 401k plan will allow partial distributions to retirees, and how flexible the distribution options are. But at 58.5 even if the plan required a full distribution, he could just split it into his 2016 living expenses and do a direct rollover of the rest to an IRA, where he would have one year to go to get penalty free IRA distributions.