Age 55+ Separation From Service Exception to 10% Penalty
I have a client that is 52 and just left his employer (Employer A). He has $500,000 in Employer A’s 401(k) plan.
He plans to start working for Employer B later this year and work for Employer B until age 55 or 56. He will then retire from Employer B at 55 or 56.
If he transfers his $500,000 401(k) with Employer A into Employer B’s 401(k) plan. Can that $500,000 moved from Employer A’s plan into Employer B’s plan be accessed from Employer B’s 401(k) plan (before 59.5) at age 55+ using the 55+ exception with no early withdrawal penalties? Or can the age 55 rule only be used for balances in Employer B’s plan that were contributed while working for employer B?
Permalink Submitted by Alan - IRA critic on Wed, 2022-04-13 18:47
Client can roll prior qualified plan or IRA balances into the current plan and access them penalty free following separation from the current employer at 55 or later – but obviously only if the current plan will accept such rollovers. Another factor is whether Employer B’s plan following separation will allow flexible distributions from that plan rather than just a lump sum distribution, because the high marginal rates on a large distribution could be more costly than just paying the penalty. Client needs to therefore determine if plan B will accept the rollover and also if they allow flexible distributions after separation. If not, client could fall back on a direct rollover to an IRA and using a 72t plan from the IRA, since the 72t plan provides the partial distributions that can control taxes, but not the flexibility as to the amount distributed.