AboutDavid M Iannopollo Expertise I am a professional financial advisor who can assist you with answers on mutual funds, annuities, IRA's, rollovers, qualified and non-qualified retirement plans, retirement planning, educational planning, life, disability and LTC insurances.
Experience I have over 20 years experience in the business and financial world.
Expert: David M Iannopollo Date: 5/12/2008 Subject: Early 401K Distribution After Age 55
Question QUESTION: I'm looking for a clarification on rules on withdrawing from a 401K plan penalty free before age 59.5. I understand that withdrawals can be made penalty free if you leave your job at any time during the calendar year in which you turn 55, or later, and you can only take money from the IRA of your last employer. I left my employer of 21 years at age 56. I left my 401K money in their plan, where it still resides. However , I subsequently worked for another employer for 15 months before they went bankrupt, although I never qualified for and therefore never contributed to a 401K plan with them. I am now 57 1/2. Am I still eligible to make a penalty free withdrawal from the 401K plan of my first employer?
ANSWER: Hi John,
As long as you "separated from service" in or after you the year you turn 55, you may make a penalty free withdrawal from your first employer's plan. You will stil be taxed as ordinary income any withdrawal amount. Keep in mind the company holding these funds will most likely withhold 20% for federal taxes. If your actual tax bracket is higher than 20%, you will owe more when you file. If your tax bracket is lower than 20%, you will credited for overpayment. Depending on your state there could also be state tax. Hope this helps. Best of luck!
Dave
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QUESTION: Thank you for your prompt response, Dave . However, because it is not addressed directly, I can't help but wonder if you missed the main point of my question. I worked for another employer AFTER the first employer. My understanding is that the rule that allows me to take money from a 401K penalty-free applies ONLY to my LAST employer. If you are telling me that I can still take the money penalty-free from the 401K of my first employer, it that because I never contributed to the 401K of my second? Is this what allows me to be an exception to the rule, if it is true that I am an exception?
ANSWER: Hi John,
This is a direct quote from the IRS website:
"You would not have to pay the 10 percent additional tax, for example, if you received the distribution after you left the company and you left the company during or after the calendar year in which you reached age 55 and your departure from the company qualifies as a separation from service."
I find nothing that says it has to be your last employer or anything to lead me to believe that working at another job after you left the first employer would disqualify you from taking a penalty free withdrawal. Some of these IRS rules are kind of open to interpretation and there are not really clauses that address specific situations such as yours. I don't personally think it would make sense if you were disqualified because you worked for another company later.
The way I read it, it doesn't matter if it was your last employer or not.
That being said, I am not a CPA, and cannot give tax advice. You should consult a CPA as they are more familiar with the tax codes than I. Best of luck!
Dave
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QUESTION: What is throwing me on this issue is the guidance posted on 401khelpcenter.com. If you go to the following URL:
you'll see the language in question in the last paragraph within the "Leaving Your Job On or After Age 55" section. I don't know where in the tax code this restriction is coming from. Any thoughts? This is why I am conflicted and seeking further clarification. Thanks............John
Answer Hi John,
I checked out that link and that's what they are saying. I also looked through IRS publication 575 and could not find anywhere where it said the withdrawal has to be from your last employer. Since neither I nor 401khelpcenter.com are tax advisors I would suggest that you either call the IRS or a tax advisor and ask them directly for clarification. If you find that what you read is correct, you may want to consider taking 72t distributions. Here is a link that explains how they work:
Just make sure that you are satisfied with the information you receive before taking any distributions. You don't want any surprises afterward.
Good luck!
