Age 55 Exception from 401k | IRA Rollover
I have a client who is retiring this summer at age 58 (turns 59.5 in Dec of 2026) with a large 401k that he will need to begin drawing on right away for income.
As I understand it, if he were to roll that money to an IRA and begin drawing, he would be hit with a 10% early withdrawal penalty. However, if he leaves the money in the 401k and requests distributions directly from the 401k, the Age 55 Exception would apply, and he would not be subject to the 10% early withdrawal penalty.
Under this scenario, could he do a partial rollover of the majority of his 401k to an IRA immediately, and leave behind in the 401k the approximate amount he will need for income over the next 18 months to draw from, thus accomplishing both getting the majority of his funds out of the 401k via a partial rollover, while also avoiding the 10% early withdrawal penalty by taking distributions directly from the 401k?
Permalink Submitted by Alan - IRA critic on Wed, 2025-03-12 13:45
This could be done, but only if the plan will allow partial distributions. Many plans will only provide a total distribution. Once the employer knows client is retiring, the client should determine exactly what the distribution options are from the 401k.
Perhaps client should consider working an additional 8 or 9 months if the plan will not provide flexible post separation distributions.
If the plan will only provide a total distribution, perhaps they would split it into a direct rollover and a distribution to client in an amount needed to get client to 59.5.
The secondary option for some taxpayers in this position is to start a 72t plan from a rollover IRA, but it would be frustrating to start an inflexible 5 year 72t plan when the client is only a year and few months from reaching 59.5.