Can you explain what is the phrase "Separation from service" refers too, on form 5329

Forum|Forum|7 years ago
June 1, 2019
2 replies
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In March 2015, at the age of 57, I was laid off. In July 2015, I withdrew a portion of my previous employer's 401K plan. On December 28, 2015 I started a Job in a city more than 75 miles from my previous job and home. I was required to relocate as a condition to accepting the position. The cost of living is substantially higher and the proceeds from the sale of my home will not allow me to have a sufficient down payment for a home in our new location. If I withdraw additional funds now (July 2016), from the same 401k planand use it as part of the down payment on a home in the new city. Will I be required to pay the 10% early withdrawal penalty in 2015 or 2016?

Best answer by Hal_Al

You are not required to pay the early withdrawal penalty at all. "Separation from service" means you left the job, whether by retirement, quitting, fired or laid off. The distribution (withdrawal) in 2016, from your previous employer's 401k, does qualify for the separation from service exception, to the early (before age 59-1/2) withdrawal penalty because you were 55 or over when you separated. There is no time limit for the withdrawal.

Had you rolled over the 401k to an IRA, any subsequent distribution from the IRA would not qualify (but might qualify for the home buyer exception). Home buying is not a penalty exception to a 401k distribution (only IRAs).

SweetieJean

Alumni - Champ

Is the remaining money still in the original 401(K) plan, or did you roll it over?

Hal_Al

Answer

Level 15

cindyheidelAuthor

Level 2

I understand that the 1st withdrawal in July 2015 meets the "Separation from service" exception. However, will a withdrawal now (July 2016) meet the separation exception now, since I have become employed? And, no I have not rolled it out of the original 401K plan.