Exceptions to Tax on Early Distributions (over 55)

Submitted by Tom Rush on Mon, 2016-08-15 22:57

If one were to Separate from Service after they turn 55 which allows them to withdraw penalty free from their 401(k) but then go to work with another employer, would the Exceptions to Tax on Early Distributions rule still be in effect? It seems that the rule stipulates that as long as they do not return to the place where the 401(k) is held, it would be fine, but I would like to confirm.

thank you.



Submitted by Alan - IRA critic on Mon, 2016-08-15 23:18

You are correct. The employee could go to work elsewhere and still take penalty free distributions from the plan from which separation occurred at 55. The plan administrator should code the 1099R with code 2, but even if they did not the employee could override it with a 5329. The penalty exception applies for separation IN the year they reach 55 or later, so in some cases, employee could separate several months before their 55 birthday and still qualify for the exception.

Submitted by Tom Rush on Mon, 2016-08-15 23:26

Thank you for your help.

Submitted by Kelly Haley on Thu, 2017-08-31 19:57

If one were to be laid off in the year they are 55, take a distribution form the companies 401(k) plan, and then at a later point be rehired by the same company would the 10% penalty still be waived?

Submitted by Alan - IRA critic on Thu, 2017-08-31 23:29

The penalty waiver would still apply if the distribution was taken after the separation, but prior to the time of re employment.

Submitted by Jessica DeBold on Wed, 2023-06-07 21:46

Alan,Do you know of an IRS or IRC resource that references this?  I have a client that is considering returning to work at the same employer on a PT basis and he will still need distributions.  I was looking for a definitive resource I could provide.  Thanks!

Submitted by Alan - IRA critic on Thu, 2023-06-08 03:33

  • The IRS has never clearly defined “separation from service” or “retirement”. As such the decision is mostly left to the HR manual of the employer. However, if a former employee returns to work prior to age 59.5, they may not even be eligible for a distribution, and under IRS rules their elective deferrals are not eligible for distribution prior to 59.5. Gains or company matches on contributions may or may not be eligible for distribution depending on the plan. The breakdown of the composition of the remaining balance after the employee has been tapping the plan depends on plan accounting. 
  • If the plan determines that the reemployed worker is still eligible for distributions, then the penalty exception becomes another issue that the IRS has never clarified. However, it seems clear enough that if the worker is no longer separated from service, then the penalty exception would no longer apply and the 1099R for any allowed distribution would likely be coded as an early distribution code 1.

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