Pre 59.5 401k Distributions without penalty

Submitted by Jeremy Boynton on Tue, 2018-12-18 22:30

Question: Where can I find definitive guidelines for pre 59.5 401k distributions that are not subject to the 10% penalty — the “age 55 rule”. Specifically, is there any restriction on timing or frequency of distributions?

I do understand that this “age 55 rule” does not apply to IRAs. And I also understand that separation from service is required at age 55 or older to take advantage of this rule…

Looking specifically for guidance with Code citation explaining the boundaries for distribitions under this “age 55 rule”.

Thank you

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Permalink Submitted by Alan - IRA critic on Wed, 2018-12-19 00:03

The applicable code Sec is 72(t)(2)(A)(v). The penalty exception is automatic for distributions from the 401k if separation occurred in the year age 55 was attained or later. The tax code places no restrictions on distributions after separation, but the PLAN may have it’s own limitations regarding partial distributions. You cannot be denied a lump sum distribution (eg full direct rollover to an IRA), but you could be limited by the plan to perhaps one distribution per year. If the plan limits partial distributions in amount or frequency, many participants end up doing an IRA rollover and starting a 72t plan to get them to age 59.5 without penalty. But if you can live with any plan distribution restrictions, that is preferable than locking yourself into a 72t plan for 5 years since 72t plans are not flexible and there is a risk of busting the 72t plan and owing retroactive penalty and interest..