Disbursement from my 401K and Roth 401K

[dersonan]

Hello:  I will turn 55 in Dec 2017 and I plan on retiring May 2017. I want to take a lump sum disbursement from my 401K and Roth 401K to pay off an investment property.
I have 2 questions:  
1. The tax code states that you sever employment in the year that you turn 55, you can take a lump sum disbursement from your 401K without paying the 10% penalty. In the scenario above, I assume that I won’t have pay the 10% penalty. Is this correct? Or do I have to wait until I turn 55 in December?
2. Will I have to pay tax or penalty on the Roth 401K if I take a disbursement in the year that I turn 55?  With the Roth 401 K account, It is not clear as to whether I will have to pay tax and/or penalty on the earnings OR no tax or penalty.

[DDollar]

You will not have to pay the 10% penalty on your 401(k) distribution.  According to the IRS:

The 10% tax will not apply if distributions before age 59 ½ are made if "Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55,"

The rules are different for your "Roth 404(k).  Instead of a 10% penalty, you may have to include a portion of the distribution in gross income.    According to the IRS:

A qualified distribution is generally a distribution that is made after a 5-taxable-year period of participation and is either:

1. made on or after the date you attain age 59½
2. made after your death, or
3. attributable to your being disabled.

A qualified distribution from a designated Roth account is not included in your gross income. You must include the earnings portion of a nonqualified distribution in gross income. However, the basis (or contributions) portion of the nonqualified distribution is not included in gross income.

[dmertz]

The exception applies if your separation from service with the employer that provides this plan occurs at *any* time during (as in your case) or after the year in which you reach age 55.

The plan administrator *should* report this with code 2 in box 7 of the Form 1099-R since they know your birthdate and separation date.  If they do report it with code 2, you won't need to file Form 5329 to explicitly claim the age 55 penalty exception.  If the plan administrator instead uses code 1, you 2017 tax return will need to include Form 5329 to claim the exception.

[re2boys]

I would recommend that the OP double check with the plan administrator to see if a lump sum distribution is allowable under the rules of the  401k plan.   The IRS allows it, but not all 401k plan documents allow the distribution at age 55.  Each plan has some leeway in setting the rules for distributions, defining hardships, etc.