Age 55 Exception to the 10% Early Distribution Penalty

Think of The Slott Report as your retirement planning problem solver. With over 1,000 articles on IRA, tax and retirement planning, you are bound to find answers to most, if not all, of your pressing questions. From time to time, we like to package a popular topic’s frequently asked questions into one article for easy viewing.

Most of us know about the 10% early distribution penalty, and still many of us know there are certain ways to avoid it. One of those ways is the “age 55 exception.” We look at the “age 55 exception” FAQs in the question-and-answer segment below.

Question: What is the “age 55 exception?”

Answer: The age 55 exception is one of the exceptions to the 10% early distribution penalty for retirement plan distributions taken prior to 59 1/2. It allows certain individuals to take distributions from their retirement plans at 55 or later (instead of 59 ½) without being subject to the 10% penalty.

Question: Is the age 55 exception available for all retirement plans?

Answer: No. The age 55 exception is only available for distributions from company plans, such as 401(k)s and 403(b)s. It DOES NOT apply to distributions from IRAs or IRA based plans, like SEP and SIMPLE IRAs.

Question: Are all distributions from plans exempt from the 10% penalty after you turn 55?

Answer: No. The age 55 exception to the 10% penalty only applies to distributions made from a plan if you separate from service in the year you turn 55 or older. Furthermore, the exception would only apply to distributions from that company’s plan, not other plans of a different company.

Question: What if I separate from service on January 1st, but turn 55 in December of the same year? Can I use the age 55 exception?

Answer: Yes, because you would be turning 55 in the same year you separated from service. The year, in this case, is the same calendar year.

Question: What if I separate from service after at 55 or later and rollover my plan balance to an IRA?

Answer: Any distributions taken from your IRA before you reach age 59 1/2 will be subject to the 10% penalty (unless another exception applies). Remember, this penalty exception only applies to distributions from company plans. Once you roll money over to an IRA, the ability to use the exception is lost.

Question: If I qualify for the exception and need to take money out of my retirement before I reach age 59 1/2, but want to roll money over to my IRA, can I leave some money in my plan and roll over the rest to my IRA?

Answer: Yes, at least from the tax code’s perspective. You will have to double check with your company plan, however, and make sure they will allow you to do so.
 

– By Jeffrey Levine and Jared Trexler