401k age 55 exception | Ed Slott and Company, LLC

401k age 55 exception

Client turned 55 in June 2018 and his company sold the power plant he worked at in Dec 2018. 401k plan did not port over to new company which he now works at effective Dec 1 2018 and he has started a new 401k plan with them.

Can he redeem funds from old 401k plan without 10% penalty since he was age 55? Old plan shows him as terminated effective Nov 30, 2018.

  • Application of the "same desk rule" will determine whether the old plan balance can be distributed. Here is an explanation of the "same desk rule". 
  • http://www.retire.prudential.com/media/managed/samedesk.pdf
  • The old plan administrator should have this question decided by now, ie whether client can be considered separated from service. If so, the penalty exception for separation in the year turned 55 or later will eliminate the 10% penalty for distributions taken directly from the plan. In addition, even if the same desk rule does not apply, he needs to be able to take flexible distributions as needed until 59.5 in order to benefit. If the plan does not allow flexible distributions, then he may need to do an IRA rollover and set up a 72t plan. That said, if he is still working as before, he probably does not on going distributions as he would be drawing down his retirement plan balance while still working.

When a client takes a 401k redemption using the age 55 exception, is their a special code on 1099R to alert IRS of such exception or does client take care of this when filing taxes?

Yes, code 2 in Box 7. Issuers usually get this right, but if not client can file a 5329 and enter exception code 01.


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