Age 55 Exception

Submitted by Peter Thomann on Mon, 2016-10-24 12:37

Does a 55 year old maintain the 10% early withdrawal penalty exception under the following circumstance? Individual takes a distribution from a DB plan and rolls over to a gov’t sponsored 401(k) plan. Are distributions from the gov’t 401(k) not subject to a penalty for 55 and older?



Submitted by Alan - IRA critic on Mon, 2016-10-24 16:13

The age 55 exception only applies to distributions directly from the plan sponsored by the employer.  If the individual then separates from the govt employer the exception would apply to the entire balance. 



Submitted by Peter Thomann on Wed, 2016-10-26 14:42

Thank you Alan.  A follow up question.  If an individual rolls an IRA into a 401k does the age 55 exception still apply to the entire balance?



Submitted by Alan - IRA critic on Wed, 2016-10-26 17:37

  • Yes it would because the funds are now part of the 401k balance. The same approach can be used to reduce RMDs if the participant is still working. TIRA funds can be rolled into the 401k plan prior to the 70.5 year and as part of the still working exception there would be no RMDs until retirement.
  • Note that if IRA funds are rolled into a 457b, they are treated as qualified plan funds when distributed, not NQ plan funds. That means that the age 55 exception would apply, but there would still be a penalty on distributions from the 457 attributed to the IRA money if the participant separated prior to 55. (Per Sec 72(t)(9).


Submitted by Peter Thomann on Wed, 2016-10-26 19:45

Thanks again Alan!



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