My wife's 401k plan unfortunately does not subscribe to the Rule of 55. She'll be leaving for good at age 56, but will have to wait till 59 1/2 to withdraw penalty free. We don't really have a need to fool with 72t, so we'll just wait.
I think that we may have misinformation being quoted in this thread.
If your DW's 401k plan allows distributions for separated employees before age 59 1/2 you should be good to go, IMHO.
401k plans, in general, are not required to allow distributions until the following occur:
From
Publication 560:
Benefit payment must begin when required. Your plan must provide that, unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the
latest of the following periods.
- The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan.
- The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs.
- The plan year in which the participant separates from service.
Provisions for earlier distributions than above would need to be defined in the plan documents.
Other than that, the requirements for the rule of 55 are shown below.
Please see
Notice 87-13, CB 432 Q&A-20 for this:
Q-20: What additional tax on early distributions from qualified retirement plans applies under section 72(t) (as added by TRA'86)?
A-20: Section 72(t) (as added by TRA'86) applies an additional tax equal to 10 percent of the portion of any "early distribution" from a qualified retirement plan (as defined in section 4974(c) of the Code) that is includible in the taxpayer's gross income. A distribution (including deemed distributions under section 72(p)) is treated as an "early distribution" unless it is described in section 72(t)(2)(A) (taking into account section 72(t)(3) & (4)). A distribution to an employee from a qualified plan will be treated as within section 72(t)(2)(A)(v) if (i) it is made after the employee has separated from service for the employer maintaining the plan and (ii) such separation from service occurred during or after the calendar year in which the employee attained age 55.
A distribution that is an "early distribution" will not be subject to the additional tax to the extent provided under section 72(t)(2)(B) (relating to deductible medical expenses under section 213), section 72(t)(2)(C) (relating to certain distributions from employee stock ownership plans), or section 72(t)(2)(D) (relating to distributions pursuant to qualified domestic relations orders). The determination of whether the additional tax under section 72(t) applies to a distribution is to be made without regard to whether the distribution is treated as a mandatory distribution for purposes of section 411(a)(11) or section 417(e).
The payor (or, if applicable, plan administrator) is not liable under section 3405 to withhold any amount on account of the additional income tax imposed under section 72(t). However, the taxpayer may have estimated tax liability with respect to such additional income tax.
Although a 401k plan document may make reference to the rule of 55,
this is not a requirement for you to take penalty-free distributions before age 59 1/2. The plan just needs to allow for distributions before age 59 1/2.
ESOP's, which were popular back in the Reagan era on the other hand, may have different requirements for penalty free distributions prior to age 59 1/2 [see Q21 in the above notice]. Perhaps this is the source of the confusion on this.
Please note I am not a professional in this area but rather an enthusiast. If someone has a reference that plan modifications referencing rule of 55 are indeed a requirement to get penalty-free access to 401ks post-separation, prior to age 59 1/2 please bring it to this discussion.
-gauss
