RULE OF 55
1. Is a clients most recent 401k guaranteed to have rule of 55 apply or does that particular plan have to allow it?
2. Seems like the biggest point of clarification from that plan would be if they allow annual withdrawals or if it would have to be all at once which wouldn’t be ideal.
I have a client retiring during year he turns 55 and I’m trying to avoid tying up more than necessary in a 72t plan so the rule of 55 seems to be very critical.
Permalink Submitted by Alan - IRA critic on Tue, 2024-10-15 11:49
The penalty exception is automatic. Even if the plan neglected to include the penalty exception code on the 1099R, the participant could claim it using Form 5329.
Yes, allowing flexible post separation distributions from the plan is vital or the higher tax bill for a very large distribution would offset the advantage of the penalty waiver.
For example, if the plan required a lump sum distribution, the participant could request enough to last for year or a little more and do a direct rollover of the rest to an IRA. When the penalty free distribution money runs out, a 72t plan from the IRA may be needed, but the risk of busting that plan will be lower because there will only be about 3 years left to reach 59.5. Even though the 72t plan will have to run 5 years, if that plan is busted the penalty will only apply to distributions taken prior to 59.5.