Distributions after age 55 form 401k
I have a client age 55 (will turn 56 1/12/2008) that will take early retirement from his job. His last day on the job will be 12/30/07, last paycheck 1/10/08. He is wanting to take withdrawals immediately.
We are trying to determine if he should rollover his 401k to an IRA. He is being told by his employer that he can be exempted from the 10% on all his distributions and is being offered the following:
1) The ability to take monthly withdrawals and to change or stop these monthly withdrawals once per year.
2) The ability to take an additional lump sum distribution at anytime.
3) No minimum withdrawal period.
4) The same 401k options he had as when he was employed.
5) The ability to rollover the enitre remaining balance at anytime.
IRS told me he would be exempt from penalty for any distributions in 2007 and 2008 but would not be in 2009 or other years before he reaches 59 1/2. I question this. Would he not be exempt from penalty on all distributions up until 59 1/2 due to the sep from service exclusion?
If the IRS agent is correct, wouldn’t he be better off to draw from the 401k until the end of 2008 and then rollover to an IRA at that time.
Permalink Submitted by Alan Spross on Tue, 2007-11-20 20:52
This is a very broad and flexible withdrawal option from the plan and he should jump on it. It will prevent the client from being burdened with a 72t plan and it’s attendant risks.
You are correct about the penalty exception being good right up through age 59.5, and the IRS agent must have mis understood or just ill informed. The key will be that the 1099R continues to be coded with the age 55 exception in Box 7, but even if it is not, client can claim the exception by attaching Form 5329.