Rule of 55 retirement plan distribution
A client has $1 million in a 401k plan. He is retiring this year and is 57 years old. He wants to use $250K for withdrawals over the next 2 years and roll the rest to an IRA. If he does roll a portion of his 401k to an IRA, is he still able to use the remaining funds in his 401k for his Rule 55 distribution?
Thank you
Permalink Submitted by Alan - IRA critic on Mon, 2021-02-08 17:52
Yes, but the main pitfall would be whether the 401k allows discretionery partial distributions after separation from service. If the plan only offers a lump sum, then the entire 250k would have to be withdrawn with the IRA rollover and would spike the marginal rate in that year even though the distribution would qualify for the penalty exception. Client should also assess any NUA opportunities if they have appreciated employer shares in the plan. Since he needs 250k anyway, if he distributes the shares as NUA in a qualified LSD, he would only owe the lower LT cap gain rate on the amount of NUA. He would still qualify for the age 55 exception on the taxable cost basis portion of the LSD. There are timing rules to be met when doing an NUA LSD, since the entire balance of the plan and similar plans would have to be distributed by year end. If he retires too late in 2021, there might not be time to do this in 2021, but doing a partial distribution in 2021 rather than an LSD would derail the plan due to intervening distributions.