55 Year old 401k Distribution
If a person has a 401k and are 55 years old and severed service from that employer, can they take a distribution from that 401k and then roll the remainder to an IRA in the same tax year. My concern is that doing this may make the distribution from the 401k subject to the 10% early withdrawal penalty.
Permalink Submitted by Alan - IRA critic on Thu, 2022-02-24 15:52
The person would have to separate in the year they reached 55 or later for the distribution to be penalty free. Separating before that year would not meet the requirement for the penalty waiver. The distribution will be subject to mandatory 20% federal withholding. Note that some plans may not offer a partial distribution, but that is a plan to plan provision.
Permalink Submitted by David Mitchell on Thu, 2022-02-24 17:50
Thank you. The person did seprate at age 55. Assuming the plan allowed this type of withdrawal, can the person then roll the remaining 401k balance to an IRA in the same tax year without causing any issues with the 10% tax penalty not being imposed?
Permalink Submitted by Alan - IRA critic on Thu, 2022-02-24 19:33
It depends. If a plan only allows a lump sum distribution, the person would have to request a simultaneous distribution of the needed amount and a direct rollover of the rest. The penalty waiver is not the issue, it’s that the plan may require the entire balance to be distributed with a single distribution. While the person could ask for a total distribution and then roll over the unneeded portion, the 20% withholding requirement may be too much to replace with other cash. The plan administrator should be asked if the plan allows partial distributions or not to understand the options.