401K rollover for age 55 laid off employee
A client age 55 is being laid off. When he requests a rollover of his 401K assets, isn’t he also able to request a distribution paid to himself which he is not rolling over? Isn’t this subject to normal taxes but 10% IRS penalty and 2.5% Calif. penalty waived? Do I have this right? Thank you.
Permalink Submitted by Alan Spross on Tue, 2009-02-03 18:33
The client can ask for a separate amount to be paid directly to him. This amount is subject to tax and 20% withholding, but the 10% penalty is waived because of the separation from service at age 55 or later exception. I believe that CA does not levy their penalty if there is no federal penalty.
Perhaps the client should determine what withdrawal options the plan offers until he is 59.5 because of the penalty waiver. If he rolls the balance to an IRA, and then needs funds from the IRA, they will be subject to penalty until he reaches 59.5. To avoid that penalty he would need a 72t plan that would have to last for at least 5 years (longer of 5 years or till 59.5). The 72t is best avoided if possible. If the plan will provide flexible installment or other periodic distributions, it may be best to leave the funds there until 59.5 to take advantage of the penalty waivers on plan distributions.