Rule of 55 & Taking New Job
Situation: Individual terminates from employment at Age 55 and utilizes the “Rule of 55” with the terminated employer 401(k) Plan to take regular and/or ad-hoc distributions in order to avoid the 10% early withdrawal penalty. If individual, then takes a new job one year later at Age 56 and participates in the new employers 401(k) Plan, can they continue taking their penalty-free distributions from the former terminated employers plan?
Permalink Submitted by Alan - IRA critic on Tue, 2023-05-16 16:11
Yes, the only requirement for the penalty exception from a plan is that the employee separated from service in or after the year they reached 55. Later employment does not affect this penalty exception from a prior plan.
Permalink Submitted by Sheri Karpa on Fri, 2023-06-02 16:00
I have a client who retired early using the rule of 55, but the employer would like to have them come back for a couple of years. Can this employee go back to work for the same employer and still take distributions using the rule of 55 or is that no longer available since he is now working for the same employer again?
Permalink Submitted by Alan - IRA critic on Fri, 2023-06-02 16:25
The exception is contingent on being separated from service. Once the employee returns they are no longer separated from service and therefore no longer qualify for the exception until they separate again.
Permalink Submitted by Sheri Karpa on Fri, 2023-06-02 19:05
Thank you!!