401K Access @ age 55+ (avoid 10% penalty)

Submitted by Lynn B. Thurgood on Mon, 2020-02-24 17:13

Need some clarification on 401K’s …. If an employee terminates employment at age 55+ my understanding is that they can access the money in the 401K without being exposed to the 10% IRS penalty as long as they don’t roll the money over into an IRA. My questions follow:

1.) If employee terminated before age 55 …. does he/she have to wait until age 55 to access the 401K without the IRS penalty?
2.) If employee rolls that money at age 55+ to a new 401K plan with a new employer does he/she still have access to the funds rolled over from the old plan prior to age 59 1/2 without the IRS penalty?
3.) If employer terminates the 401K plan and starts a new 401K plan and the employee DOES NOT rollover their old 401K into the new 401K … can an employee access money (post age 55) in the old plan without the IRS penalty?
4.) If terminated employee leaves the 401K (age 55+) with the old employer and then goes to work with a new employer and starts participating in a new 401K plan …. can that employee still access the $$$ in the old 401K (post age 55) without the IRS penalty?

Thanks for your consideration!

Lynn B. Thurgood, CLU, CAS
Albuquerque, NM
505-980-9880 – cell
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Submitted by Alan - IRA critic on Mon, 2020-02-24 20:09

  1. Age 55 is defined to include separation anytime in the year that employee reaches 55, or later. Therefore, if employee’s DOB is late in the year, the penalty waiver will still apply if employee separates early in the same year prior to actually reaching 55. Now if the employee separates prior to this age 55 year, the penalty will apply whenever a later distribution is taken. Employee cannot separate earlier, then wait to 55 to take the distribution and still avoid the penalty.
  2.  No.  He will probably still have access to the rollover money if he needs a distribution, but the penalty will apply to distributions before he reaches 59.5 or separates from service from the new employer.
  3.  Probably not, since employee has neither a separation from service or a separation from employment. But employee should check with the plan.
  4.  Yes, however the old plan may not allow flexible distributions, they might require a lump sum distribution that would spike their marginal tax rate and offset the benefit of the penalty waiver. This is when early retirees might have to resort to a 72t plan from their IRA after doing a direct rollover.

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