Distribution from a 401(k) that was converted to IRA by employer due to business closure

My client is 58 years old and needs to take a distribution from her former’s employer’s 401(K) for living expenses. They were terminated in April of 2020 due to Covid19 closure (business was sold) and the 401(k) was converted into an IRA by the company. Will the client be subject to a 10% penalty if they take a distribution?



Yes, since this is now an IRA account. Client could have avoided the penalty by either taking a distribution from the 401k after termination and applying the age 55 separation exception to waive the penalty OR taking an IRA distribution up to 12/30/2020 as a CRD since client did qualify for a CRD. The age 55 waiver does not extend to IRA accounts. Therefore, unless client qualifies for an IRA based penalty waiver, they will have to wait until 59.5 to avoid the 10% penalty.



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