AGE 55 401K REDEMPTION
401k participant turns 55 on April 1, 2021. Participant is terminated March 1, 2021 and intends to take a redemption in July 2021.
Does this participant need to be age 55 before termination date or by 12/31 of calendar year or by distribution date?
Permalink Submitted by Alan - IRA critic on Fri, 2021-02-12 23:38
No, the age 55 separation from service penalty exemption applies to all distributions from the sponsoring plan if the participant retire anytime in the year they reach 55, or later. Therefore, this participant will qualify and the 1099R Box 7 should be coded “2” for any distributions taken after separation from service. The one challenge here is that some plans only offer a lump sum distribution, not partial distributions. In that case, the participant should be able to distribute the amount they want and have the rest directly rolled over to an IRA. In other words, if the plan will not support partial distributions, forcing the participant to take a large distribution to tide over to 59.5, would result in the marginal rate spiking despite avoiding the penalty. Plans that require lump sum distributions therefore, often lead to a total IRA rollover and a 72t plan from the IRA to eliminate the penalty. Participant should detemine what partial distributions options will exist from this plan post separation.
Permalink Submitted by MIKE KRUCHTEN on Sat, 2021-02-13 11:23
If the employee finds gainful employment with a different employer I assume this won’t effect this exception ? To clarify, partiicpant would be allowed to take partial distributions from 401k (if plan allows logistically) to supplement other income without incurring the 10% penalty.