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Question about IRS age 55 exception
I started a 72t plan in 4th quarter 2019. The 72t plan is based upon my Thrift Savings Plan 401k from federal government service, which I did not roll over to an IRA (the 401k had advantages over an IRA related to protection of assets from major stock market declines). The fact that I didn't roll over to an IRA both hurts and helps me in my current situation.
A few days ago, my prior federal agency inquired whether I would be interested in returning to my prior position for 18 months. If I accept their offer, it would bust my 72t plan as of the first paycheck because they would again begin making automatic employer contributions to my 401k and there is no way to avoid this. I'm early enough in my 72t plan that busting it wouldn't be a problem money-wise. My problem comes with what happens afterwards - there are the new life expectancy tables mandated under the 2022 changes to contend with, plus 120% mid-term interest rates are 1/3 of what they were when I started my plan in 2019 so starting a new 72t at the end of my employment would probably net me a lot less money to pay my bills. As a result I'm looking for alternative plans on how to proceed.
My question is regarding the age 55 exception to the 10% penalty. I would turn age 55 later in the year my temporary appointment would be scheduled to end, but not until several months after my scheduled termination date from employment.
The IRS website on the age 55 exception says "Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental benefit plan, as defined in section 414(d) if you were a qualified public safety employee (federal state or local government) who separated from service in or after the year you reached age 50".
I interpret the IRS language above to mean that even if I don't turn age 55 until December, so long as my employment terminated at some point after January 1st of the year I turn age 55 I'd meet the exception still be able to avoid the 10% penalty. Am I reading and understanding this correctly? And, if I do meet the exception, would I have to wait until my 55th birthday to again begin penalty-free withdrawals from my 401k or could I immediately begin penalty-free withdrawals when I again leave my job even though I was not yet age 55?
Your interpretation is correct. The age 55 exception applies if you WILL turn 55 at any time before 12/31 of that year. You do not have to wait until you reach age 55. You did a great job in researching. Maybe you should start a 2nd career counseling others, including most accountants and ttax preparers who don't know about this.
I have been doing this for many years, as has Alan and the developer of the original website. The SEPP 72-T is a tremendous provision (as well as NUA, Net Unrealized Appreciation of Employer shares), and both are known about, and more importantly understood, by a limited number of tax professionals.