Withdrawals from Employer 401k post-55
Any help would be appreciated.
Situation: Client is 55 years old and retiring from job of 30+ years to open his own business. Would like to withdraw money from 401k (still with employer) for living expenses until his business is creating income. I know he can withdraw money from his emplyer’s plan after age 55 without a 10% penalty.
My question is: Do these withdraws need to follow a SOSEPP payment plan or can he wihdraw different amounts each year, as needed without incurring the 10% penalty?
Permalink Submitted by Alan Spross on Wed, 2008-08-06 00:49
The age 55 penalty exception only applies after separation from service. If he withdraws funds from the plan now, they will be subject to penalty as well as ordinary tax. The only actual distributions he could get while still employer are hardship distributions or a loan.
After he separates he gets the penalty exception, but that only works well if he can take flexible distributions from the plan. He needs to check with the plan administrator to see what options are available after separation. Taking out too much in a single year will increase his tax bracket and undo the advantages of a penalty waiver.
After separation, if he cannot get the flexibility he needs, he could transfer the balance to a TIRA and set up a 72t plan to avoid the penalty. But those plans are not flexible and he would have to adhere to the plan for 5 years if he opts to go that way.