withdrawing money from 401k plan at 55

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bb
Posts: 325
Joined: Wed Apr 25, 2007 10:04 pm

withdrawing money from 401k plan at 55

Post by bb »

I was wondering if all 401k plans allow you to leave employment at 55 and
take distributions penalty free? My plan document doesn't mention being
able to do that. Are the rules governing this set by the plan or IRS?
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prudent
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Joined: Fri May 20, 2011 2:50 pm

Re: withdrawing money from 401k plan at 55

Post by prudent »

ObliviousInvestor has a nice writeup on that topic here.
Alan S.
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Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: withdrawing money from 401k plan at 55

Post by Alan S. »

This is an IRS rule, so your distributions will be penalty free. Your 1099R should be coded with a 2 in Box 7, but even if it is not you can claim the exception yourself by filing Form 5329 and entering the exception code for the age 55 separation. The plan cannot deny you the penalty exception.

However, a plan could derail the value of this exception by not offering flexible distributions from the plan and requiring a lump sum distribution. If you took out enough to last until age 59.5 and rolled over the rest, your tax bracket for the distribution year could be increased and that would erase the positive benefit of the penalty waiver. Fortunately, very few plans require lump sum distributions.
OutInThirteen
Posts: 381
Joined: Thu Mar 14, 2013 2:11 pm

Re: withdrawing money from 401k plan at 55

Post by OutInThirteen »

Good news - you don't even need to be 55! It's a common misperception, and you see it wrong almost all of the time in the media, even from supposed finance professionals.

You only have to become age 55 in the year you separate from service to avoid the 10% early withdrawal penalty. If your birthday was December 31st, you could separate from service on January 1st, the day after you turned 54, and withdraw from your 401(k), 403(b), or TSP penalty free.

You'll also often see it stated that you can avoid the penalty "if you lose your job at age 55" - but it can be voluntarily quitting your job, retiring, etc.

Pet peeve session over.
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