401(k) rollover to an IRA
Does 401(k) rollover monies lose that designation, when rolled into an IRA, for the penalty exception ” separating from service after age 55″?
The client left his job at age 56 and upon leaving the company rolled over the 401(k) to an IRA. Then he needed to take a distribution in the next year when the money is now in the IRA. Does this distribution qualify for the above noted exception?
Does it matter if it was rolled into a new IRA or if merged into an existing IRA?
I would appreciate an IRS cite or court case if known? Thanks.
Sue
Permalink Submitted by Alan Spross on Mon, 2007-11-19 18:14
Unfortuneately, once those funds are transferred to an IRA, the age 55 separation exception is lost. It does not matter whether the IRA is a new or existing account. This mistake happens quite often, as does loss of NUA opportunities when the employer shares are transferred to an IRA. The loss of the penalty exception is often addressed with starting a 72t plan set up with IRA distributions. These distributions must last for the longer of 5 years or until age 59.5 is achieved.
The att’d is pasted from Sec 72t:
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(v) made to an employee after separation from service after attainment of age 55,
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Limitation of the age 55 exception to qualified plan distributions is also cited in Pub 17, p 75 (06 edition).