Former Employers 401K Plan Distribution | Ed Slott and Company, LLC

Former Employers 401K Plan Distribution

I have an old employers 401K and am considering 3 options for the funds in this account. The choices would be to leave my funds in the old 401K, rollover the funds into a Traditional IRA or roll the funds into my current employers plan. My specific question pertains to the 10% penalty(or no penalty) before the age of 59 1/2 under each scenario if I were to need to access any of the funds in these accounts. I am pretty clear on the advantages and disadvantages of other aspects of each option. I understand that I can take distributions from a current employers 401k between the ages of 55 and 59 1/2 without penalty if no longer with that employer but unclear on about a former employers plan. For the record I am 56 year old and the current company I work for purchased my old employer in 2015(the old 401k) when I was 51 years old. Please let me know if I'm correct on the information below for the 3 different options concerning the 10% penalty.

1) Leave funds in old 401K. Because the company was purchased when I was 51 years old and under the age of 55 the rule of 55 would not apply and I would have to wait until age 59 1/2 to access the funds without penalty.

2) Old 401K to Traditional IRA Rollover-I would have to wait until age 59 1/2 to withdraw any funds without penalty

3)Old 401K to current employers 401K. I can access funds in my current employers 401K at any time without penalty since I am between the ages of 55 and 59 1/2.

  1. That is correct.
  2. Correct. Or start a 72t plan from the IRA if that made sense.
  3. If you leave current employer before 59.5, distributions directly from the plan will be penalty free under the age 55 penalty exception. That would also include any distributions from that plan from rollovers of the other accounts into your current employer plan. That said, the value of penalty free distributions is compromised if the plan does not allow you take flexible annual distributions because large distribution intended to tide you over until 59.5 might well spike your marginal tax rate in the distribution year.

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