401(k) distribution at age 55

[Kea]

I know you can take penalty free distributions from a 401(k) if you are at least 55 and separated from service. My 55 year-old client, who left that job last year, is now working at a part-time job and asked if that was a problem. (He might need to start withdrawing money later this year.) I said I would have to verify. I was pretty sure it just meant you had to be separated from the job where you earned the 401(k).

When searching through the IRS site, I noticed it specified that you had to leave the job after you were at least 55.

A rule I thought I knew fairly well, has now got me confused.

He can avoid the penalty even though he works part time, because it is a different job?

But because he left the job at age 54, he doesn't avoid the penalty?

Is that correct?

He will still have the option of taking substantially equal payments over his lifetime.

Thanks so much.

[kcjenkins]

You are correct. Must be 55 or older when you leave the job, for that exception.

[Kea]

You are correct. Must be 55 or older when you leave the job, for that exception.

Thanks. I was hoping I was wrong.

[JohnH]

If your client decides to go the "Substantially Equal Payments" route, here is a great site for getting tips, answers, and planning strategies. I'v been monitoring it for about 2 years now, and I think it has real value. I wish I had known about it the last time I had a client who needed to set up an SEPP since their financial advisor was useless in this situation. The moderator is very knowledgeable and the replies to specific questions are generally right on target.

http://72t.net/Discussion/ViewPosts.aspx

One strategy he can follow is to move the money into an IRA, then split it into a large and a small one. He sets up the SEPP (72t) distribution from the larger IRA, which will enable him to avoid paying the penalty on that distribution amount. If that doesn't provide him sufficient income he can take withdrawals from the smaller IRA to make up the difference in his cash needs. He will only pay the penalty on the distributions from the smaller IRA. Depending upon how much he has in his plan, this can make a huge difference in the penalty he pays on his withdrawals.

[Kea]

Thanks so much for the tip. I'll pass this along to him.

I really appreciate the input.