401(k) Age 55 Distribution with Interrupted Service

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FuzzyButtons
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401(k) Age 55 Distribution with Interrupted Service

Post by FuzzyButtons » Wed Feb 25, 2015 7:57 am

I've been employed with my current company from 1994-2010 and 2012-today. I have contributed to my 401(k) plan during this entire time, and I did not roll it over to an IRA during the time I was not employed. As a consequence, I have a single 401(k) for all my contributions and earnings, both before and after I was not employed here.

I want to retire at age 55 and begin taking distributions without penalty, as described in Topic 558 on the IRS website. This comes from the rule that allows penalty-free distributions from the current employer's 401(k) plan, as long as the termination of service happens in or after the year I turn 55.

My question is, how much of my 401(k) will be accessible without penalty at this time? All of it, or just the contributions and earnings I have made since I started this last continuous term of service (i.e. 2012 and later)? And if it is just the latest portion, will I be able to take distributions specifically from that portion of the holdings, or must I pro-rate my distributions and thus end up paying a penalty on a portion of it?

It never occurred to me that the earlier contributions might be treated differently. But I recently noticed that my 401(k) provider is tracking them separately, and that has me concerned. Thanks in advance for anyone who has specific information about this situation.

retiredjg
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Re: 401(k) Age 55 Distribution with Interrupted Service

Post by retiredjg » Wed Feb 25, 2015 9:25 am

My understanding is that any money in the 401k when you separate, in or after the year you reach 55, is fair game. I looked for some confirmation of that, however, and did not find any. It could be one of those things that is ok simply because it is not prohibited. If so, it could be difficult to find proof that it is not prohibited.

This article does hint that you could even roll in money from outside sources before separation and have access to it.

http://www.401khelpcenter.com/401k_educ ... O3YAhZihpE That makes sense to me, but I don't know if it is correct.

livesoft
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Re: 401(k) Age 55 Distribution with Interrupted Service

Post by livesoft » Wed Feb 25, 2015 9:33 am

Although the IRS allows age-55-separated-from-service-no-penalty distributions, that does not mean that your 401(k) plan allows that. They do not have to. One really should be asking these questions of the 401(k) provider.
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retiredjg
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Re: 401(k) Age 55 Distribution with Interrupted Service

Post by retiredjg » Wed Feb 25, 2015 9:56 am

I think this is law, not specific to a plan.

2014 Publication 575, page 34. Referring to the 10% penalty....

Additional exceptions for qualified retirement plans. The tax does not apply to distributions that are:

From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees) (see Separation from service, later),

Topic Author
FuzzyButtons
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Re: 401(k) Age 55 Distribution with Interrupted Service

Post by FuzzyButtons » Wed Feb 25, 2015 10:58 am

retiredjg wrote:My understanding is that any money in the 401k when you separate, in or after the year you reach 55, is fair game. I looked for some confirmation of that, however, and did not find any. It could be one of those things that is ok simply because it is not prohibited. If so, it could be difficult to find proof that it is not prohibited.

This article does hint that you could even roll in money from outside sources before separation and have access to it.

http://www.401khelpcenter.com/401k_educ ... O3YAhZihpE That makes sense to me, but I don't know if it is correct.
Thanks, retiredjg - that makes me feel much better. I was stuck in the same "can't prove a negative" hole, but that information on rollovers is very helpful. I'm going to work from the premise that it will be allowed for now - I can always work a bit longer if needed once the time comes.

ERISA Stone
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Re: 401(k) Age 55 Distribution with Interrupted Service

Post by ERISA Stone » Wed Feb 25, 2015 12:02 pm

See the instructions on page 15 for the 1099-R form, code 2: "A distribution from a qualified retirement plan after separation from service in or
after the year the participant has reached age 55."


http://www.irs.gov/pub/irs-pdf/i1099r.pdf

retiredjg
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Re: 401(k) Age 55 Distribution with Interrupted Service

Post by retiredjg » Wed Feb 25, 2015 4:43 pm

ERISA Stone, maybe you can help interpret this. Is your point that it does not say anything about where the money came from or when it got there....only that it is in the 401k and the person meets the age requirement?

ERISA Stone
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Re: 401(k) Age 55 Distribution with Interrupted Service

Post by ERISA Stone » Wed Feb 25, 2015 5:08 pm

retiredjg wrote:ERISA Stone, maybe you can help interpret this. Is your point that it does not say anything about where the money came from or when it got there....only that it is in the 401k and the person meets the age requirement?
I'm saying it's allowed. I take your comment to mean you are asking about a rollover source within a qualified retirement plan. Yes, this would be included in the exception as long as the distribution is from a qualified retirement plan (i.e., a 401k plan).

The only caveat I recall is the participant has to be active to age 55. For example, this exception would not apply to someone who terminated when he was age 50, and then decided to take a distribution from the plan when is turns 55.

retiredjg
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Re: 401(k) Age 55 Distribution with Interrupted Service

Post by retiredjg » Wed Feb 25, 2015 5:40 pm

That is what I thought and I think that is what the original poster is hoping. I just could not find it written down anywhere.

Alan S.
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Re: 401(k) Age 55 Distribution with Interrupted Service

Post by Alan S. » Thu Feb 26, 2015 1:37 pm

I agree that the entire plan balance including rollovers will receive the age 55 separation exception code 2 on the 1099R.

The only code provision that assesses the penalty according to the source of funds is when an IRA or QRP is rolled into a 457b plan, which of course has no early withdrawal penalty at any age. But in that case the 457b must keep track of the balances of these rollovers and they become subject to penalty in cases where participant does not meet the age 55 separation provisions. In other words, if the participant separates at 54, those rollover balances are subject to penalty as the 457b does not erase the penalty. (REF Sec 72(t)(9).

retiredjg
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Re: 401(k) Age 55 Distribution with Interrupted Service

Post by retiredjg » Thu Feb 26, 2015 1:46 pm

Alan S. wrote:I agree that the entire plan balance including rollovers will receive the age 55 separation exception code 2 on the 1099R.
It almost seems like you could separate from service and do rollovers into the 401k afterwards and still have no penalty. Any thoughts on that?

ERISA Stone
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Re: 401(k) Age 55 Distribution with Interrupted Service

Post by ERISA Stone » Thu Feb 26, 2015 2:50 pm

retiredjg wrote:
Alan S. wrote:I agree that the entire plan balance including rollovers will receive the age 55 separation exception code 2 on the 1099R.
It almost seems like you could separate from service and do rollovers into the 401k afterwards and still have no penalty. Any thoughts on that?
TBH, I'm not familiar with any regulation related to this, but I don't think a terminated participant can make a contribution to a qualified retirement plan. IMO, it wouldn't be in the best interests of the employer either.

retiredjg
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Re: 401(k) Age 55 Distribution with Interrupted Service

Post by retiredjg » Thu Feb 26, 2015 3:06 pm

ERISA Stone wrote:TBH, I'm not familiar with any regulation related to this, but I don't think a terminated participant can make a contribution to a qualified retirement plan. IMO, it wouldn't be in the best interests of the employer either.
Some plans will allow incoming rollovers (not contributions), even after separation. I thought this was common, but perhaps it is less than common.

ERISA Stone
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Re: 401(k) Age 55 Distribution with Interrupted Service

Post by ERISA Stone » Thu Feb 26, 2015 3:13 pm

retiredjg wrote:
ERISA Stone wrote:TBH, I'm not familiar with any regulation related to this, but I don't think a terminated participant can make a contribution to a qualified retirement plan. IMO, it wouldn't be in the best interests of the employer either.
Some plans will allow incoming rollovers (not contributions), even after separation. I thought this was common, but perhaps it is less than common.
Interesting. Maybe the situation never came up with any of my clients. I'm not sure if we're playing semantics but an incoming rollover is a rollover contribution for plan purposes.

retiredjg
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Re: 401(k) Age 55 Distribution with Interrupted Service

Post by retiredjg » Thu Feb 26, 2015 3:29 pm

ERISA Stone wrote:Interesting. Maybe the situation never came up with any of my clients. I'm not sure if we're playing semantics but an incoming rollover is a rollover contribution for plan purposes.
I know I rolled money into the TSP (federal 401k-like plan) after I retired. People have talked about keeping a good (old) 401k as a repository for future rollovers so they could do back door contributions to Roth IRA. Mostly anecdotal "facts" (if they can be called that).

I suppose a rollover is a rollover contribution. But it is not the same thing, at least in my mind. Could be semantics. :happy

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