Expert: Allen - 7/5/2007

Question
I have at my current employer both a 401k and a cash balance pension ( with a lump sum option ).  What I'd like to do is retire in 2010 when I turn 55. As I understand it, I can at that time make withdrawals without penalty from the 401K.  Since I can take the pension as a lump at that time, I'd like to "roll" it into the 401k.  In an IRA I'd basically have limits on withdrawals until 2014. So, the 401k makes it more accessable.  Is this kind of move usually do-able ?  If not, how about rolling the pension lump into a different employer's 401k for a few months and then retiring from that one ?

Answer
There are two relevant sections of the Internal Revenue Code.

Section 72(t)(2)(v) states that distributions from a pension or profit sharing plan are not subject to the 10% penalty tax if they are "made ... after separation from service after attainment of age 55". A 401k plan is a type of profit sharing plan. So this section should apply to all distributions from any employer plan that you participate in. The important condition is that you must have separated from service. There are two things to be aware of. First, the separation can't be a sham. There might be a problem if you quit and then are rehired by the same employer soon thereafter. Second, a literal reading of the wording in the law is that the separation must occur after attaining age 55. It's not clear if the penalty would apply if you quit at age 52 and then took money out at age 55. I would ask the trustee how the payments would be coded on the 1099R form.

Section 72(t)(2)(iv) states that payments from a pension plan, a profit sharing plan or an IRA will not be subject to the penalty tax if they are "part of a series of substantially equal periodic payments". If the payments are from a pension plan or a profit sharing plan, they must also be made after separation of service. This extra requirement does not apply to distributions from an IRA. As you mentioned, there are limits on the withdrawals. However be aware of the fact that the limits may go beyond 2014. The limits apply for the GREATER of 5 years or until attainment of age 59 1/2. So if payments began on your 56th birthday, the limits would apply until your 61st birthday.