401K and Early Withdrawal Exemptions

[JonnyRed]

Hopefully this is the correct forum for this topic. I will be 52 years old in 2024 and I am employed as a Deputy Sheriff and have been the last 23 years. All of these years with the same municipality here in Georgia. Anyways, I understand that there is an exemption to the 10% early withdrawal penalty from the 401K for public safety personnel that separate from service at 50 or above. I reached out to our 401k company to inquire about distribution options post-retirement and was given some very disheartening news. The 401k plan as set up by the county does not allow for systematic distributions (monthly, quarterly, etc). Upon separation from employment you can take the entire balance as a distribution or roll over into an IRA. Crunching the numbers, I am facing a 42.5 % tax liability if I take the balance (this is without paying the 10% penalty). I do not want to roll over into IRA out of fear that the money will no longer be accessible penalty free. I feel caught between a rock and a hard place. I have been a cop for 23 years and cannot imaging doing this job until 59 1/2 y/o. Do any of you happen to know if I will lose my early withdrawal exemption by rolling out of company 401k to IRA? Thanks

[SevenUp]

Quote:

Originally Posted by JonnyRed Do any of you happen to know if I will lose my early withdrawal exemption by rolling out of company 401k to IRA? Thanks

Yes, you will lose that particular one. But see How to withdraw funds from your IRA and 401k without penalty before age 59.5 and articles linked there for other options you could use.

[badatmath]

Tax question hijack: If you have take a distribution under "rule of 55" will it be 1099 code 2 and no 5329 required?

I'm fairly sure my plan allows this but I have not looked into it yet as it only just recently occurred to me I might do this.

[aaronc879]

Can you afford to retire if you reduce your 401K by 10%? If so, ignore the penalty and retire. Take your expected retirement expenses, deduct your pension payment amount from your expenses. That is the amount you need to cover from your 401K. Lets say your expenses are $60K and your pension is $30K. That means you need $30K/yr from your 401K. Multiply $30K by 25 to get $750K. In this example you can retire if you have $750K in your 401K after deducting the 10% penalty. This not does take into account future SS so it is a conservative plan. Best of luck.

[SevenUp]

Quote:

Originally Posted by badatmath Tax question hijack: If you have take a distribution under "rule of 55" will it be 1099 code 2 and no 5329 required?

Depends on how attentive to detail the plan provider is. It should be code 2 in the 1099-R box 7, but they can take the easy way out and use code 1, leaving you to use reason code 01 on line 2 of form 5329.

[badatmath]

Quote:

Originally Posted by SevenUp Depends on how attentive to detail the plan provider is. It should be code 2 in the 1099-R box 7, but they can take the easy way out and use code 1, leaving you to use reason code 01 on line 2 of form 5329.

Thanks. I will hang on to this. I am hearing bad things about the provider help desk so far (they just moved the accounts) but I should think the actual people that code the 1099 are experienced so I was just looking. I won't be taking any actions before Jan if I go this route.

[SevenUp]

Quote:

Originally Posted by badatmath Thanks. I will hang on to this. I am hearing bad things about the provider help desk so far (they just moved the accounts) but I should think the actual people that code the 1099 are experienced so I was just looking. I won't be taking any actions before Jan if I go this route.

See Table 1. Guide to Distribution Codes for what the 1099-R should have, and Exceptions to the Additional Tax on Early Distributions for your recourse if the 1099-R is not correct.

[jazz4cash]

Seems odd to have 401k for Gov’t employee instead of 457 or 403B(?). I think 457’s are more user friendly wrt early withdrawals.

OP, I suggest you read the Summary Plan Description ( or Plan Prospectus ) for yourself. Do not rely on verbal answers from a plan rep. At the least get a copy of the SPD and have them show you exactly where it says you cannot get early access.

[badatmath]

Quote:

Originally Posted by SevenUp See Table 1. Guide to Distribution Codes for what the 1099-R should have, and Exceptions to the Additional Tax on Early Distributions for your recourse if the 1099-R is not correct.

Oh thanks again. I'm stuck on hold with another unrelated problem which seems to be the story of my life the last week or so. . . so perhaps I can be forgiven for being so paranoid they will mess up something I haven't even done yet!