Exception to Early Withdrawal Penalty from 401k
A client is 58 years old, has been with ATT for 27 years, and is still actively employed. Her CPA told her she can take money from her 401k as an in-service withdrawal and avoid the 10% early withdrawal penalty because she has worked there at least 25 years. I thought this exception only applied to public safety employees but the wording below is confusing (see below from the IRS website). Is she in fact able to make a withdrawal from her 401k without penalty after 25 years of service? Thank you!!!!!!!!!!!!!!!!!
Exceptions to the Additional Tax on Early Distributions
| No. | Exception |
| 01 | Qualified retirement plan distributions (doesn’t apply to IRAs) you received after separation from service when the separation from service occurs in or after the year you reach age 55 (age 50 for qualified public safety employees and private sector firefighters) or 25 years of service under the plan, whichever is earlier. |
Permalink Submitted by Alan - IRA critic on Tue, 2025-03-18 13:37
Yes, but only after separation from service. While there some other in service distribution penalty waivers that might apply, none of them are related to years of service.
It appears that the CPA overlooked the separation requirement. Unless separation is planned, the employee might consider a 401k loan or wait until reaching 59.5.
Permalink Submitted by Jonathan Sard on Tue, 2025-03-18 13:49
So if she separates from service after 25 years of service but is still under the age of 55, she can make a withdrawal from the 401k and not owe the penalty? It is the verbiage bolded below that is throwing me off. Thanks!!
Exceptions to the Additional Tax on Early Distributions
No.
Exception
01
Qualified retirement plan distributions (doesn’t apply to IRAs) you received after separation from service when the separation from service occurs in or after the year you reach age 55 (age 50 for qualified public safety employees and private sector firefighters) or 25 years of service under the plan, whichever is earlier.
Permalink Submitted by Alan - IRA critic on Tue, 2025-03-18 14:11
To qualify for this penalty exception, the separation from service must be in the year they reach 55 or later. They cannot separate prior to age 55, then wait until 55 to use the exception.
For public safety employees only, the age 55 requirement is reduced to age 50 or 25 years of service if not yet 50.
If the person is not a public safety employee, the 25 years does not apply, and they must separate in the year they reach 55 or later to qualify for the exception.
That said, in order for this exception to be useful, the plan must allow allow flexible post separation distributions. Some plans will require a total distribution, that would result in high taxable income for the distribution year, high enough that their marginal rate would probably increase, offsetting the advantage of avoiding a penalty. Therefore, an employee planning to separate at 55 should also determine if the plan will provide flexible distributions until age 59.5.