Age 55 Penalty Free Withdrawals from 401k
If an employee has an active plan and rolls a previous employer plan into the active 401k, could the rollover funds be withdrawn penalty free after age 55?
If an employee has an active plan and rolls a previous employer plan into the active 401k, could the rollover funds be withdrawn penalty free after age 55?
Permalink Submitted by Alan - IRA critic on Tue, 2016-03-22 02:00
Yes. And the same holds true for IRA funds rolled into the 401k. Of course, this only applies if the separation from service occurred during or after the year the participant reached 55.
Permalink Submitted by Tammy Marrs on Tue, 2016-03-22 15:03
Just to clarify, the separation of employment from the previous employer did occur prior to age 55. Is that an issue or would the funds still be penalty free?
Permalink Submitted by Alan - IRA critic on Tue, 2016-03-22 17:25
The age 55 penalty exception only applies if the date of separation is in the year the participant reaches 55 or later. The participant cannot retire earlier and wait to 55 to take a distribution and receive the penalty waiver. If the old 401k balance is rolled into an active 401k plan, the penalty on the entire balance would be waived only after the participant separates from the active plan at 55 or later.
Permalink Submitted by Tammy Marrs on Thu, 2016-03-24 15:19
Just to clarify, John Doe leaves employer at age 50 with $100,000 401k. He rolls the entire balance into his new employer plan and subsequently retires at age 56. The total balance at that time is $300,000. Assuming he maintains all funds in the new employer plan, is the entire $300,000 not subject to the 10% penalty?
Permalink Submitted by Alan - IRA critic on Thu, 2016-03-24 16:59
Yes, the entire 300k qualifies for the age 55 separation exception to the penalty.