Age 55 Penalty Exception

Submitted by Brandon Blanchard on Sat, 2023-01-14 17:01

My client just started with a new employer. He is 52. Plans to retire around 56 or 57.

He said his new employer doesn’t have the rule of 55 which would allow him to leave that employer once he reaches 55 and take penalty free distributions from his 401(k). Could that be right?

I thought the rule of 55 was an IRS rule and all 401(k) plans had to abide by it. Or is it only if the specific plan adopts that rule?



Submitted by Alan - IRA critic on Sat, 2023-01-14 17:56

You are correct. The penalty waiver is an IRS rule that can be claimed on Form 5329 even if the plan refuses to show Code 2 on the 1099R. However, what the plan could do is require that all distributions be total distributions and that would offset the penalty waiver with a higher marginal tax rate depending on the plan balance. The new plan can also decline to accept rollovers from an IRA or prior plan when such rollovers would make the entire balance penalty free after separating at 55 or later.

Submitted by William Tuttle on Sun, 2023-01-15 13:56

  • Alan’s reply of allowed plan limitations is well taken, but this could also be miscommunication.
  • As you properly noted, this is simply one of the enumerated 72t exceptions to the 10% early withdrawal penalty.
  • The so called “Rule of 55″, is really just a slang term for this exception.
  • It could be the use of this term elicited the negative response or even that the employer’s/administrator’s representative was not correct.
  • It is worthwhile to more fully research this including with the SPD and plan actual plan document if necessary. Including all of the possible restrictions Alan raised.

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