AGE 55 penalty free withdrawal from 401k plan
If a client retires from a company at age 55 or later and has a 401k plan at the employer, would past employers 401k rollovers that he has previously transferred into the existing plan qualify for penalty free distributions?
Example: At age 45 and age 50 the client changes jobs and consolidates those 401k’s into his new company plan. Client then retires at age 55 and has current employer contributions in existing 401k plus previous 401k rollovers in the final plan. Are these treated differently for penalty free distributions?
Permalink Submitted by Alan - IRA critic on Thu, 2021-06-03 16:11
The entire balance in the 401k plan will be eligible for the penalty exception regardless of whether the balance came from rollovers from other plans or IRAs. But the key to using the penalty exception is whether the plan allows flexible partial distributions each year. Some plans limit post separation distributions to lump sum distributions, in which case a spike in tax rates for the distribution year might offset the penalty savings. Participants with plans having this restriction often end up doing a rollover to an IRA and setting up a 72t plan to avoid the penalty on IRA distributions. But a 72t plan is otherwise a last resort solution.