401k plans & age 55 distributions
Does the IRS require that all 401k plans allow distributions at age 55 with no 10% penalty if employment has been terminated, or is that plan specific?
Does the IRS require that all 401k plans allow distributions at age 55 with no 10% penalty if employment has been terminated, or is that plan specific?
Permalink Submitted by Alan Spross on Mon, 2010-03-01 19:06
Plans MUST allow distributions after separation from service, and if the separation occurred in the year the employee turns 55 or later, the penalty exception is automatically allowed per IRS rules in all such cases. This should result in a 1099R code of “2” in Box 7, but if the plan does not provide the exception coding on the 1099R, the taxpayer can claim the exception using Form 5329.
Permalink Submitted by Martin Helmer on Mon, 2010-03-01 20:38
It’s not usual, but a 401k plan might still require more than leaving employment to qualify for a distribution. The plan might require, for example, that the person meet the plan’s stated retirement age. See “Alert Guidelines,” Checksheet 4 question II. b., and there’s likely something in the Explanation to checksheet 4 with the cites.
Permalink Submitted by Steve Waas on Tue, 2010-03-02 16:16
Although Publication 575 does state that there is an exception to the 10% penalty rule if you separate from service “in or after the year you reach age 55,” the IRS code itself states that this exception applies “…after attainment of age 55” — Sedtion 72(t)(2)(v).
Pub 575 implies that the exception applies even if you separate before your 55th birthday, as long as that birthday occurs in the year of separation (or later). But when I called the IRS and asked if this is the correct interpretation, they said “no” and cited the abovementioned part of the code.
It appears that you must have actually had your 55th birthday when you separate –otherwise the exception does not apply and the penalty remains until 59 1/2.
Permalink Submitted by Alan Spross on Tue, 2010-03-02 18:45
That is more bad guidance from the IRS – the definition of age attainment for the age 55 separation exception has been decided since 1987 per Notice 87-13:
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Q. What is the Age 55 Exception to the 10% penalty?
A. The age 55 exception only applies to distributions made from qualified employee rertirement or annuity plans – it does not apply to an IRA. Distributions made to you after you separated from service with your employer, if the separation occurred after you reached age 55, are not subject to the 10% penalty tax.
For the definition of age 55, IRC Notice 87-13 states… “such separation from service occurred during or after the calendar year in which the employee attained age 55.”
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The 1099R instructions also indicate that the Code 2 exception applies “after separation from service in or after the year the taxpayer has reached age 55”.
For public safety employees the equivalent age is 50.