401k early withdrawl penalty exemption question
Hello
I thought I read somewhere that if you have a 401k at a company and you leave OR are terminated. You are exempt from an early withdrawal penalty if you are younger than 59.5?
I could be making this up, but wanted to confirm.
Did not find this circumstance on the list here https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions
Thanks!
Permalink Submitted by Alan - IRA critic on Thu, 2025-02-20 20:57
The separation from service penalty exception applies to qualified plans if you separate from service in the year you reach 55 or later. The 1099R reporting a distribution should have code 2 in Box 7 which eliminates the penalty.
That said, many plans only allow total distributions after separation, and if you took a total distribution large enough to fund your expenses until age 59.5, the regular income tax on a large distribution would probably offset the benefit of the penalty exception.
Therefore, this penalty exception is most valuable when the plan allows you to take flexible partial distributions after separation from service. The exception does not apply to an IRA if you roll over the 401k to an IRA.