10% penalty on pension rollover
If a worker age 56 rolls over his lump-sum pension to his company 401k upon retirement, will it be subject to the 10% early withdrawal penalty if he takes a withdrawal prior to age 59.5? Assume the company plan allows early withdrawals without penalty from the regular 401k account without penalty.
Permalink Submitted by Alan - IRA critic on Mon, 2021-06-21 15:37
Good question. There is no clear guidance in this case where a rollover is made into the 401k after separation from service, rather than prior to separation. I doubt that the 401k has a mechanism to track the balance already in the 401k at the time of separation and provide the penalty exception code on the 1099R for only amounts up to that balance. If the plan codes the distribution as early (code 1) due to commingling of the 401k balance, then the worker will need to claim the exception using Form 5329 and entering their own exception code for the separation exception, and the IRS could challenge this since this particular code is typically provided by the plan, not by a taxpayer override on Form 5329. Therefore, the worker should ask the 401k administrator how they would code such a distribution.