Seperation from Service at 55 Penalty Exception, Distributions
I’ve read quite a few forum listings and think I have a pretty good handle on this but I have a few questions that weren’t directly addressed.
I turned 55 in March, 2015, separated from my job in June with the last payment in August. I wish to take early distributions to support me in transition and in starting up a new business. I plan on leaving my assets in the current 403(b) with the possibility of moving it to a 401(k) under the new business or converting the remainder to a ROTH IRA.
I do not wish to take small, periodic, equal distributions, which I understand to be under 72(t) and more restrictive. I need flexibility. I understand that my plan will withhold a minimum of 20% and I’ll pay taxes at the rate on my regular income for the total amount of distributions in the tax year.
I keep reading the words “lump sum” in association with this penalty exception. Is the distribution a one time deal in the year I turn 55 or can I spread the distributions out over time, up to 59 1/2, if necessary?
If they are permitted in my plan and can be spread out over time, are the timing and amounts of these distributions flexible or do they have to be equal amounts and consistent periods? In other words, can I take distributions in varying amounts and at any time?
Thanks!
Permalink Submitted by Carl Leland on Wed, 2015-11-04 23:41
If I work part-time, as a non-benefitted employee for the same employer does this interrupt the penalty exception.
Permalink Submitted by Alan - IRA critic on Thu, 2015-11-05 00:59
The 403b provisions will determine what hours or work schedules will result in not being considered separated from service and therefore receive code 2 in Box 7 of the 1099R. You need to be considered separated from service in order to qualify for the age 55 penalty exception, and also to get a distribution at all. The plan provisions also determine whether you can take flexible distributions or if a lump sum is required. If you had to take a lump sum, that would wipe out much of the benefit of the penalty waiver since you would then have 4 or 5 years of income to report in a single year, and that would probably increase your tax rate for that year. Note that 20% is the minimum federal withholding on distributions from the 403b plan, but you can increase that % if the 20% will not be enough.
Permalink Submitted by Carl Leland on Fri, 2015-11-06 02:26
Your comments were very helpful. I’m very grateful for your prompt response and the information. Thank you for the reminder about the withholding. I’ll check my tax rate to make sure enough is being withheld.It seems the 403(b) I’m in is quite flexible. According to the representative, I’m able to set up periodic distributions of any amount AND varying amounts at intervals TBD. They recommend I call HR at my previous employer to define seperation from service.