withdrawing from 401k penalty free at 55

[linusbeagle]

Question,

it is my understanding you can withdraw from a 401k penalty free at 55 if you retire from your job during the year you turn 55.

question, my wife left her job when she was 53, however she will receive bi-weekly severance up until the year she turns 55, her 401k funds are still with the same plan, will she be able to collect penalty free in the year she turns 55?

any help would be appreciated!

[Larry Starr]

No.  You have to separate from service AFTER 55 to be eligible. The fact that it is severance means she is not an employee and that occurred prior to 55 so you don't get the freebee.

[linusbeagle]

thanks so much for the fast reply Larry!

[ETA Consulting LLC]

Just a little additional insight; that's not really applicable in this case.  The age 55 is 'within the calendar year' the participant turns 55 and not necessarily the actual age.  For instance, the participant can terminate employment on January 1, 2018 while not turning age 55 until December 31, 2018 and still get exempted from the 10% excise penalty.

The same is NOT true for the age 59-1/2 distribution.  In that case, you must actually reach the date which is 6 months after your 59th birthday.

Good Luck!

[Larry Starr]

On 11/17/2018 at 11:02 AM, ETA Consulting LLC said:

Just a little additional insight; that's not really applicable in this case.  The age 55 is 'within the calendar year' the participant turns 55 and not necessarily the actual age.  For instance, the participant can terminate employment on January 1, 2018 while not turning age 55 until December 31, 2018 and still get exempted from the 10% excise penalty.

The same is NOT true for the age 59-1/2 distribution.  In that case, you must actually reach the date which is 6 months after your 59th birthday.

Good Luck!

Agreed.

[david rigby]

The OP asks about "collect penalty free".  Does this mean a rollover is not anticipated?  

Termination at 55 or distribution after 59-1/2 are only two of the characteristics that provide exemption to the 10% penalty.  Do any of the others apply?

[spiritrider]

Rollovers are allowed at any age upon separation. However, the age 55 penalty exception only applies to withdrawals from qualified plans that you separate from in the year you are >= age 55.

You can certainly rollover to another plan or IRA. However, the distribution rules there apply. This can be both good and bad.

If you separate >= the year you turn age 55 and rollover to an IRA, no age 55 exception exists on the IRA's distributions. However, if you rollover from a plan you separated from in a year < age 55 or from an IRA to your current plan. You can use the age 55 penalty exception for the full balance.

As you might have been alluding to. Plan distribution rules still apply. A plan can only allow lump sum and RMDs. In this case the age 55 penalty exception may be less useful.

[jashendorf]

On ‎11‎/‎19‎/‎2018 at 7:54 PM, spiritrider said:

As you might have been alluding to. Plan distribution rules still apply. A plan can only allow lump sum and RMDs. In this case the age 55 penalty exception may be less useful.

Am I missing something? Did the OP give any information about the specific terms of the Plan? Not that it really matters, because Mrs. OP doesn't qualify anyway, but I'm curious.

[spiritrider]

No the OP just made the statement; "withdraw from a 401k penalty free at 55 if you retire from your job during the year you turn 55."

I was just making the point that this may not be as useful as people expect. Plans can place restrictions on distribution options. Some have such severe restrictions that it greatly reduces the value of "withdraw penalty free".