is a Rule of 55 401k distribution eligible for 60 day rollover?

Submitted by Ralph Miller on Thu, 2013-01-31 16:57

56 yr old member separated from employer after age 55, now seeking to access $20k of her $86k retirement funds but plan only allows full distribution, not partial. She wants to avoid the 10% early withdrawal penalty under rule of 55 but doesn’t really want to take the full tax hit by taking it all out.
Can she take full distribution without penalty but with the accompanying 20% fed tax withheld, then glean off her needed $20k, then roll the remainder back into an IRA within 60 days to reduce the actual taxable amount?
And if possible thru other spousal resources, also within 60 days, can she make up some or all of the withheld tax amount to eliminate that obligation and receive credit back on her 2013 tax forms?



Submitted by Alan - IRA critic on Thu, 2013-01-31 19:35

Yes, if the withheld amount (17.2k) can be replaced from other funds to complete a 60 day rollover, there will be a final taxable amount of 20k with no penalty. But it would be easier to do a direct rollover for 61k avoiding most of the withholding, plus a gross distribution to her of 25k. 20% withholding on the 25k will net her the needed 20k. That way, she only needs to come up with 5k to replace the withholding instead of 17.2k. And if she cannot, she will only be taxed on 20k plus 5 k instead of 20k plus 17.2k. If she does replace the entire 5k from other funding, she could also reduce her 2013 withholding or estimates to get the 5k back sooner than the 2013 filing season.

Submitted by Ralph Miller on Thu, 2013-01-31 22:06

that would have been my hope for the two pronged withdrawal but again, the plan only allows full withdrawals. 

Submitted by Alan - IRA critic on Thu, 2013-01-31 23:27

This is a full withdrawal, and the plan must allow that full distribution to be split between a direct rollover and another portion paid directly to the employee per IRS Reg 1.401(a)(31) Q 9 copied below:

Q–9: Must the plan administrator permit a distributee to elect to have a portion of an eligible rollover distribution paid to an eligible retirement plan in a direct rollover and to have the remainder of that distribution paid to the distributee?A–9: Yes, the plan administrator must permit a distributee to elect to have a portion of an eligible rollover distribution paid to an eligible retirement plan in a direct rollover and to have the remainder paid to the distributee. However, the plan administrator is permitted to require that, if the distributee elects to have only a portion of an eligible rollover distribution paid to an eligible retirement plan in a direct rollover, that portion be equal to at least a specified minimum amount, provided the specified minimum amount is less than or equal to $500 or any greater amount as prescribed by the Commissioner in revenue rulings, notices, and other guidance published in the Internal Revenue Bulletin. See §601.601(d)(2)(ii)(b) of this chapter. If the entire amount of the eligible rollover distribution is less than or equal to the specified minimum amount, the plan administrator need not allow the distributee to divide the distribution.Q–10: Must the plan administrator allow a distributee to divide an eligible rollover distribution into two or more separate distributions to be paid in direct rollovers to two or more eligible retirement plans?A–10: No. The plan administrator is not required (but is permitted) to allow the distributee to divide an eligible rollover distribution into separate distributions to be paid to two or more eligible retirement plans in direct rollovers. Thus, the plan administrator may require that the distributee select a single eligible retirement plan to which the eligible rollover distribution (or portion thereof) will be distributed in a direct rollover.

Add new comment

Log in or register to post comments