Ask The Expert

Questioner: Sally

Question: I have a small 401k account ($15k) with my current employer. I am 55 and my employment will end this August. In September, can I withdraw the entire amount with just 1 payment and also avoid the 10% penalty?

Answer: First and foremost you have a couple of different options that in my opinion could prove more flexible that Section 72(t). In my opinion Section 72(t) is sometimes to rigid, especially for someone as young as yourself.

If you do not need the money right now, I would definitely consider a rollover into a traditional IRA. This will allow you to be able to continue to grow this money longer and will not incur any taxes or penalties while it is invested in the IRA.

If you do need the money, you could consider what is called a "Age 55 exception".  If you are at least 55 years old when you leave your job, you will not have to pay an early distribution tax on any distribution you receive from your former employer's retirement plan. (You will have to pay income tax on it, however.)

This exception applies only to distributions you receive after you have separated from service, or terminated your employment with the company that sponsors the plan. You don't have to retire permanently. You can go to work for another employer, or even return to work for the same employer at a later date. But you cannot receive a distribution from your employer's retirement plan while you are still employed with the company if you want to use the age 55 exception to the early distribution tax.

This exception is relevant only if you are between ages 55 and 59 1/2. After age 59 1/2, the early distribution tax does not apply to any retirement plan distribution.

As with other exceptions, the devil is in the details. For this exception, you need not be age 55 on the day you leave your job, as long as you turn 55 by December 31 of the same year. The strategy falls apart if you retire in a year that precedes the year you turn 55, even if you postpone receiving the retirement benefits until you reach age 55. This exception does not apply to IRAs.

Well if neither of those don't work, then I guess you can go ahead and do a Section 72(t) distribution.

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