QUESTION:
Dear Mr. Slott,
I have a client who, during 2022, was separated from employment, turned 55, and took a distribution from his former employer’s 401(k) account. We properly used the Rule of 55 exception to avoid the 10% early withdrawal penalty. During 2023 (without consulting me), he rolled the remaining balance of that former employer’s 401(k) account into an IRA, and THEN took a distribution from that IRA account. Does the 10% penalty apply to this distribution?
Thanks,
In her June 28, 2023 Slott Report post, Sarah Brenner discussed several reasons why it pays to roll over your retirement plan savings to an IRA. Another option is to keep your funds in the plan. Keep in mind, though, this may not always be possible. Sometimes your plan may force you to take your dollars out, for example when you reach the plan’s retirement age (normally, age 65) or if you have a small account balance.
Each day we receive dozens of retirement-related questions from advisor members of the Ed Slott Elite IRA Advisor Group. Conversations range from incredibly complex to obscure to, “I just need you to confirm what I was thinking.” Whether a long explanation is required or a quick comment, our members have our undivided attention. We take every question seriously and proactively fill in any information gaps. Here is a random sampling of some recent communications:
If you participate in a company retirement plan, such as a 401(k), there's a way you can take a distribution and get out of paying the 10% early distribution penalty if you're under age 59 ½ at the time of the withdrawal. The rule is sometimes called the “age 55 rule.” Click to learn more about this rule.
Most of us know about the 10% early distribution penalty, and still many of us know there are certain ways to avoid it. One of those ways is the "age 55 exception." We look at the "age 55 exception" FAQs in the question-and-answer segment below.
The National Council on Aging maintains a web tool at www.BenefitsCheckUp.org that can help adults over age 55 figure out which of the more than 2,000 federal, state and private benefits programs they might qualify for based on their financial situation and location.
