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Company letting me go. I'm 55 and have $30,000 in cash balance. Do I have to pay a penality?

been with company 27 years, letting go of 90% of the staff

May 07, 2014 by chris from Tampa, FL in  |  Flag
3 Answers  |  6 Followers
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2 votes

Typically, not. If the balance is in a 401k and you are separating from service, you can by pass the 59 1/2 rule associated with IRAs, etc. Just don't roll it to an IRA, take your distribution directly from the 401k

Comment   |  Flag   |  May 07, 2014

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Luke Collova Level 8

The answer is that it depends on the employer plan that your money is in as well as your specific situation. If it is a qualified employer plan, such as a 401(k), then you would need to meet one of several circumstances to not pay an early withdrawal penalty. Some of these circumstances are things like you have become disabled, gone thru a qualifying hardship, you have allowable medical expenses, or the withdrawal is related to a domestic order. Also some plans will allow you to set up equal periodic payments for at least 5 years, or until you reach age 59 1/2, whichever is longer. The best course of action for you is to contact the human resources or personnel department of your company and ask them what your options are with the plan in question. Best of luck to you! Luke

3 Comments   |  Flag   |  May 08, 2014 from Seattle, WA
Jeffrey D. Zesiger, MS, CFP®

Hello Luke,

Flag |  May 08, 2014
Jeffrey D. Zesiger, MS, CFP®

Actually now, there is a provision within the Internal Revenue Code (§72(t)(2)(A)(v) ) that allows one to start taking distributions from ERISA-qualified employer-established defined contribution plans (i.e. 401(k), 403(b), federal TSP, etc.) before age 59½. As such, if someone was employed by a company and participating in the company’s ERISA-qualified employer-established defined contribution plan and then leaves employment with that company (during or after the year in which they reach age 55), there would be no penalty for taking distributions from the plan.
The important thing to remember, as I mentioned above, is that these distributions only qualify as penalty free distributions if taken directly from the company-sponsored retirement plan, (not if they are first rolled out to an IRA account). The great thing about this approach is that it allows people to potentially start retirement earlier than age 59½, taking distributions without penalty and without having to set up Substantially Equal Periodic Payments.

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Flag |  May 08, 2014
Jeffrey D. Zesiger, MS, CFP®

I hope that helps Chris!

Flag |  May 08, 2014

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Generally, separating from service after age 55 (or in the year in which you turn age 55, as long as you'll be 55 by the end of the year) is an exception to the early withdrawal penalty for a withdrawal from a 401(k). So given the limited information here, it appears you would be eligible for the exception and not be subject to the penalty.

However, bear in mind that even if you're not subject to a PENALTY, receiving the funds will still be taxable income, and you will owe taxes at the end of the year associated with this withdrawal if you take the money out.

You can "roll over" the funds to an IRA to preserve the tax deferral, though note that if you roll the money over to an IRA the early withdrawal penalty will apply once again until you turn 59 1/2. To preserve access to the funds without a penalty, you would want to leave them in the 401(k) plan for now (if you can do so).

Comment   |  Flag   |  May 09, 2014 from Columbia, MD

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