avoiding 10% penalty from Qualified Profit Sharing plan
Employee has Profit Sharing plan in place. Employer ONLY contributions made. Works for private company. Eligible to retire at age 53. Doesn’t have any outside savings to pull from. My understanding is that there is NO way around avoiding the 10% penalty between age 53 and age 55. Any dollars taken out of this PSP (assuming dollars remain with the employer) at this time would be subject to penalty. At age 55, IF the employer’s Plan docs allow for retiring employee to carve out a portion of funds and take constructive receipt (enough to meet income needs for next 4.5 yrs) and then do a direct rollover of the balance of retirement benefit into an IRA (that he wouldn’t tap into until post age 59.5) under this type of scenario he would not be subject to the 10% early withdrawal penalty. I am aware of the 72-t option from a direct rollover into an IRA; however, the amount may not be enough and thus may not fit his income needs. Am I missing anything?
Permalink Submitted by Alan - IRA critic on Tue, 2013-04-02 17:41
The “carve out” plan at 55 will not waive the penalty unless he does the rollover first and then the plan would have to adhere to SEPP plan rules to avoid the penalty. It would be better for him to just roll the entire balance to an IRA and then start a SEPP using the entire balance in that case. So his choices are:
Permalink Submitted by Catherine Turner on Tue, 2013-04-02 18:49
Thank you for reply. Addressing your comment on the “Carve out” at age 55 when there has been a separation. I have worked on cases where a retiring employee has been allowed to carve out (do a partial) and do a rollover into an IRA and take a lifetime annuity payout of the balance of a defined benefit pension plan OR take a partial lump sum distribution (20% tax) and roll the balance into an IRA (again Def Ben Pension Plan) and here is another example: the retired employee who withdrew one years living expenses from 401(k) FIRST and then rolled over the balance into an IRA. In none of these situations did the 55 yr old employee face a 10% EW penalty. Does the type of plan have anything to do with it?