Avoiding 10% penalty after age 55

Submitted by Robert Witt on Fri, 2019-03-08 19:02

I have a client (49) that is considering switching jobs – the bulk of her money is in a 401(k) and she wants to retire between 55 and 59 ½ and would use the 401(k) for spending after separating from service at 55. If she moves jobs and the new job’s plan allows for 401(k) to 401(k) rollover, and she then separates from service with the new company after 55, can she avoid the 10% penalty on those prior plan dollars assuming she continues to hold them in the new company’s plan?



Submitted by Alan - IRA critic on Fri, 2019-03-08 19:41

  • Yes, the penalty would not apply as there are no restrictions that apply to rollover funds accepted by the new 401k with respect to the age 55 separation exception. 
  • However, the client should check with the new plan to determine what flexible distribution options are offered after separation from the new plan. If a lump sum is the only option, then client would have to distribute enough to tide her over to 59.5 and do a direct rollover with the rest. That could result in a higher marginal tax rate for the distribution year.
  • Another option to consider, particularly if the new plan options and expenses are not beneficial is to do a direct rollover of the old plan to an IRA. If the new plan will accept 401k rollovers, they probably also accept IRA rollovers, and to improve the odds of that the old plan should be rolled to a rollover IRA and kept separate from any contributary IRA balances. However, if client is doing back door Roth IRAs, the rollover TIRA will have a negative affect and could push the balance back over to rolling the old plan to the new 401k.

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