401k "rule of 55" and going back to work for same employer questions

[Jimonlimon]

I retired at the end of 2023 at age 58-1/2. I took some money out of my (former) government employer sponsored pre-tax 401k using the so-called "rule of 55".

Now I have an opportunity to do some part-time work for the same former employer which is appealing- it's the work I always loved before 90% of my time was doing manager things. I would be paid my full former rate but with no deductions other than FICA and taxes the money would be a nice perk. Due to our kid's college scholarship, it is important that we limit our taxable income this year, so if I were to do this work I would put almost all of the income into the 401k. This is allowed by the plan.

Question: Going back to work and/or making contributions to the 401k would I run into an early withdrawal penalty for the money I already took out? Basically is one allowed to retire from an employer, draw using the rule of 55, then go back to work part time for the same employer?

I'll turn 59-1/2 in November so after that point any 401k draws wouldn't be "early".

 

[londo]

I'm not a CPA nor an IRS agent, but if I wanted an answer to this question I would head to the IRS form which implements penalties and the exception for Rule of 55 to see what it says.

That would be form 5329, and the instructions for line 2. Note that the IRS calls a penalty an "additional tax". The instructions say:

"Line 2: The additional tax on early distributions doesn’t apply to the distributions described next.

Exception No 01: Qualified retirement plan distributions (doesn’t apply to IRAs) you received after separation from service when the separation from service occurs in or after the year you reach age 55..."

That's it. It doesn't say there's any exceptions to the exception.

Form 5329

 

[Jimonlimon]

Thanks. I didn’t think about looking for a form to pay the potential penalties.

IRS topic 558 says it’s exempt. I’ll stop worrying about the what-ifs.

• Distributions made to you after you separated from service with your employer after attainment of age 55.

 

[Al18]

I have no experience, but think it’s wise to get an official answer from the company. My guess - you won’t be penalized for the 401K withdrawals you have already made. But if you return to working for the company, you no longer qualify for the exemption and will not be able to withdraw any more money from your 401K while you are working.

 

[Jimonlimon]

Thanks. If I go back to work for them part-time I wouldn’t need any more withdrawals until after age 59.5.