401k Withdrawal at 55 or older with no Penalty

[DAYDREAMER]

Here is a tax loophole I was not aware of.

During a company sponsored seminar for retirement planning, the presenter mentioned that if you are 55 or older, and have a separation in service (retired early after 55) you can withdraw any amount of money from a "Qualified" 401k without penalty.

I had to check this to make sure it was correct. Sure enough, the presenter was correct. Here's the IRS link that explains it.
401(k) Resource Guide - Plan Sponsors - General Distribution Rules

Tax on early distributions. If a distribution is made to a participant before he or she reaches age 59½, the participant may be liable for a 10% additional tax on the distribution. This tax applies to the amount received that the employee must include in income.

Exceptions. The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances:

Made to a beneficiary (or to the estate of the participant) on or after the death of the participant.
Made because the participant has a qualifying disability.
Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the participant or the joint lives or life expectancies of the participant and his or her designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period.)
Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55.
Made to an alternate payee under a qualified domestic relations order (QDRO).
Made to a participant for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the participant itemizes deductions).
Timely made to reduce excess contributions.
Timely made to reduce excess employee or matching employer contributions.
Timely made to reduce excess elective deferrals.
Made because of an IRS levy on the plan., or
Made on account of certaindisasters for which IRS relief has been granted.

 

[REWahoo]

Do a search of the subject on the forum and you should see many threads where this has been discussed.

 

[DAYDREAMER]

I did a search before I posted this. The only thing I could find was information regarding Substantial Equal Periodic Payments or 72T Discussions.

My post is different.

 

[REWahoo]

I did a search before I posted this. The only thing I could find was information regarding Substantial Equal Periodic Payments or 72T Discussions.

My post is different.

Here are a couple....

http://www.early-retirement.org/forums/f28/rule-of-55-a-24254.html
http://www.early-retirement.org/forums/f26/401k-withdrawals-at-age-55-w-o-penalty-15888.html

 

[DAYDREAMER]

Yup, that's exactly what my post is about. I need to learn how to use the search tool more effectively. Thank you!!!

 

[veremchuka]

that's why i left 60% of my 401k when retired in case i needed money because any distribution from a roll over ira would have included the 10% penalty before 59 1/2. my stable value is pretty good, better than most bond funds and no nav decreasing as interest rates rise, so i never moved it out.

 

[fisherman]

Here is a tax loophole I was not aware of.

Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55.
.

This is the kicker as you have to work till the year you turn 55 and then leave to do this. If you leave before 55 it does not apply.

 

[REWahoo]

This is the kicker as you have to work till 55 and then leave to do this. If you leave before 55 it does not apply.

Almost. The rule actually allows you to leave "during the calendar year you turn 55", meaning you could leave on Jan 1 and meet the requirement provided you turned 55 on or before Dec 31 of that same calendar year.

And Martha pointed out one other potential hurdle:

However, the employer doesn't have to allow you to spread out the withdrawls and might make you take the amount you want to withdraw all at once. This can lead to a big tax bill.

 

[RunningBum]

that's why i left 60% of my 401k when retired in case i needed money because any distribution from a roll over ira would have included the 10% penalty before 59 1/2. my stable value is pretty good, better than most bond funds and no nav decreasing as interest rates rise, so i never moved it out.

Can't you do a 72T out of an IRA? Haven't looked at doing that myself since I have plenty of non-retirement account funds to use, and (I think) I'd be better of doing partial conversions of my TIRA to Roth rather than withdrawing. Should be plenty of hits if you search the ER forums on 72T, or just google it and look at reputable sites.

 

[JohnDoe]

I think I read that not all 401k plans/employers allow this.

 

[Martha]

Yup, that's exactly what my post is about. I need to learn how to use the search tool more effectively. Thank you!!!

Searching here can be hit or miss, I find that the Google search generally works better than the forum search tool. Anyway, it never hurts to bring this benefit up again as it hasn't been discussed in a while.

 

[zinger1457]

Can't you do a 72T out of an IRA? Haven't looked at doing that myself since I have plenty of non-retirement account funds to use, and (I think) I'd be better of doing partial conversions of my TIRA to Roth rather than withdrawing. Should be plenty of hits if you search the ER forums on 72T, or just google it and look at reputable sites.

Yes you can do a 72T from an IRA before 59.5 but your withdrawals options are limited and once you start you have to continue until you reach 59.5. There's a lot of planning that needs to take place when setting up a 72T, if you're not careful in your calculations you could be stuck paying some early withdrawal and interest penalties.