401K cash out at 57

Submitted by James Aspros on Tue, 2019-06-04 17:20

I recently retired from my company at age 56 with a defined pension for life. I left my 401K within my previous employer and have not yet rolled it over to an IRA.
I have not gone back to any further employment and just drawing pension.
I am looking to relocate back to Canada, my origin country.
Been in the USA over 20 years and hold both Canada and USA citizenships.
With a strong US dollar I am considering liquidating my 401K and converting my cash to CAD in Canada at the current exchange rates.
I understand the instant 20% withdrawal tax that my employer would hold.
I also read about the added 10% early withdrawal being less than 59 1/2 , however can I benefit from the age 55 rule? (Separation from service rule) that the IRS has.
How would I move forward with this if I rightfully qualify to liquidate and avoid the early extra 10% penalty.

Your help and guidance greatly appreciated.

Thanks.



Submitted by Alan - IRA critic on Tue, 2019-06-04 17:30

Since you qualify for the age 55 separation exception, the plan should code your 1099R with Code 2. However, if the 1099R shows Code 1 in error, then you can file Form 5329 to claim the exception yourself. You would enter exception code 01 on line 2 of the 5329.

Submitted by James Aspros on Tue, 2019-06-04 18:05

So in a nutshell I should be looking at a 20% withholding tax on my total liquidation of funds and not 30%.thanks  

Submitted by Alan - IRA critic on Tue, 2019-06-04 18:51

Yes, the 10% penalty will not apply. That said, your withholding rate could still be higher than 20% depending on how the tax treaty applies to dual citizens. It might matter whether you take the distribution while still living in the US or later in Canada.

Submitted by David Mertz on Tue, 2019-06-04 19:29

Is the 401(k) in question the plan of your company that you just left at age 56 or is it the plan of a previous employer that you left before the year that you reached age 55?  If the 401(k) is at an employer that you left before the year you reached age 55, the age-55 exception does not apply.

Submitted by James Aspros on Tue, 2019-06-04 21:32

It‘s in fact the company 401K I just left after 28 years at age 56 and nothing previous nor after.I have not worked since leaving in October 2018. thx

Submitted by James Aspros on Wed, 2019-06-05 04:42

believe if I pursue 401K liquidation, it must be done here in USA prior to becoming resident back in Canada…I believe.. and the age 55 rule of separation of service only possible with my funds in a company 401K and not rolled into an IRA.thats why I’ve not yet touched my funds in the 401K.ill need to seek some consultation guidance on this.going forward I’ll have to continually file USA income taxes whilst in Canada as this is the law.very complex and costly it will be. 

Submitted by Bruce Steiner on Mon, 2019-06-10 12:45

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