Separation of Service
L1: Separation of ServiceI was separated from service by my employer on June 13 2014. I turned 55 on June 3 2014. I fall into the exemption for the 10% penalty for distributions before age 59.5, but I moved the money from my companies 401k to my individual IRA. Does this now exclude me from the exclusion? What is my best course of action? Since I will need to distribute any money to myself through my brokerage, how do I do this and still avoid the 10% tax and the mandatory 5 year rule associated with the 72t. Can I simply tell my brokerage to indicate the exclusion on my 1099 by citing the rule?2015-06-11 18:37, By: Brad, IP: [18.104.22.168]
L2: Separation of ServiceSORRY, You are a year late, and even if you asked us last year, you would have been too late once you inadvisably moved your 401-K to your IRA.
The rule about 55 and separation from service only applies to distributions from 401-K to yourself individually in the year you separated from service if you would be 55 by 12/31 of that year, and later years. Once you move your funds from the 401-K to an IRA, you have lost all of those capabilities, and fall under the 59 1/2 rules for IRAs.2015-06-11 19:58, By: dlzallestaxes, IP: [22.214.171.124]
L3: Separation of ServiceWhy would the type of account matter? 401k vs. IRA, or was it the fact that I made a transfer?2015-06-11 21:15, By: Brad, IP: [126.96.36.199]
L4: Separation of ServiceYES. The Separation from Service/Age 55 provision only applies to 401-K retirement plans, not to IRAs (which is age 59 1/2).
Don’t shoot the messenger. Blame Congress for this stupid difference, and the insanity of 59 1/2 and 70 1/2 in the tax code. It isn’t even IRS’ fault.2015-06-11 21:27, By: dlzallestaxes, IP: [188.8.131.52]
L5: Separation of ServiceBrad, if you will need to start a 72t plan (SEPP) go to the home page of this site and click on SEPP Planning pointers. Before you start a plan you have to be sure the amount you can receive will be enough for your expenses for the term of the plan (5 years in your case) because if you need more and take more out, you will bust the plan and owe retroactive penalties and interest. While you should let your IRA custodian know you are starting a 72t plan, do not trust them to monitor your distributions for you. Your plan is between you and the IRS.
It is possible that your former plan would not have allowed you to take flexible distributions from the plan, although most do. If your plan would have required you to take a lump sum distribution, the taxes on the large distribution might more than offset the 10% penalty waiver, and force you into an IRA rollover and72t plan anyway.2015-06-11 23:42, By: Alan S, IP: [184.108.40.206]