Regarding age 55 rule (avoid 10% penalty on 401k withdraw if separated from company when 55+), does this still apply if you become re-employed with another employer?

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If so, should I just leave the funds with that former employer (since I can withdraw penalty free) and open a new 401k with the new employer?

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Opus 17Answer

Level 15

Becoming re-employed with a different employer does not change your ability to withdraw from the previous 401(k) without the 10% penalty. Become re-employed with the same employer probably does cancel that provision because you generally can't withdraw any money while you are employed with the plan sponsor (except for limited hardship withdrawals).

For the old 401(k) you have the option of leaving it there or transferring it to your new 401(k) or rolling it over to a private IRA. If you transfer to the new 401(k) you will have the least options and be limited by the no-withdrawals-during employment rule, so I would not do that.

If you roll over to an IRA, you change the rule about withdrawing after age 55 if you separate from service, into the rule about no withdrawals until you turn 59-1/2. So a rollover would limit your withdrawal options for the next 4 years.

On the other hand, a private IRA will probably give you many more investment choices than the previous employer's 401(k) plan.

So the two factors you need to consider are, likelihood of wanting to withdraw money before you turn 59-1/2 vs the investment choices available to you.

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Opus 17