Penalty Free 401k withdrawals
We have a client whose only qualified money is in her 401k (shes’s the business owner) but would like to do Roth conversions. She’s currently 51, and her plan administrator says that the IRS doesn’t allow penalty-free withdrawals from their plan prior to 59.5, which makes sense.
Studying the rules, I do see that there’s an exception for SEPP, so if she were willing to commit to withdrawals until 59.5 and could amend the plan, would that work? Also, she could amend the plan to add a Roth and Roth conversion provision and do conversions inside the plan.
Can you think of any other ways to do Roth conversions without penalties?
Thanks,
Jennifer
Permalink Submitted by Alan - IRA critic on Mon, 2024-09-16 11:46
A SEPP would not work and could not be established while the plan is active. And SEPP distributions are not eligible for rollover (conversion) anyway.
She could amend the plan to provide for Roth contributions and in plan Roth rollovers (IRRs), although they would not be needed unless she wants to roll over more than she could contribute as Roth 401k contributions. An IRR includes an exception which allows her former pre tax contributions to be rolled in plan to the Roth account and are not treated as a distribution from the plan. There is no penalty for IRRs, but ordinary income tax will be due.
Permalink Submitted by Jennifer Butler on Mon, 2024-09-16 11:51
Thanks for your response!