Age 55 Exemption From 10% Penalty From Plans
I have a client with five 401k’s (4 from former employers and 1 from his current employer). He’s 54 and would like to retire next year, at age 55. I advised him that he could only utilize the “Age 55 exemption from the 10% penalty” with respect to his currenty employer’s plan, and not from the other four prior 401k’s, because he won’t be “seperating from service” at age 55 from the four prior 401k’s. So, he responded with, “Well, what if I move the four old 401k’s to the new plan? Then, all my money will be with my current plan. Can I still utilitize the Age 55 Exemption from the 10% penalty?” I said, “I don’t know. I’m not sure if there are rules against commingling your current 401k with the prior 401k’s, or not”. So, that’s my question: Can my client avoid the 10% on his four old 401k’s by transferring those monies to his current employer’s 401k plan? Thanks!
Permalink Submitted by Alan - IRA critic on Tue, 2024-07-09 19:46
Yes, he can. The penalty exception has no limitations with respect to the portions of the 401k that are eligible for the exception.
That said, many plans do not allow partial distributions post separation. If his current plan only allows a total distribution, while there would be no penalty, his marginal rate would be spiked in the year of the total distribution and while he could roll over the portion he didn’t expect to need before 59.5, the amount he did not roll over would still concentrate that taxable income into a single year. Therefore, before rolling all these other plans into the current 401k, he should determine whether the plan will allow flexible partial distributions after he separates.
As you probably know, the penalty exception applies to separations in the year he reaches 55 or later, so he does not have to wait until the actual day he reaches 55.