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New Member

Early distribution of 401K penalty exceptions

I turned 54 in early January 2017 before I was laid off work January 27, 2017. I was at the company for 14 years. I took money out of my 401K to pay my mortgage, bills and insurance. My wife is not working and she was over the age of 55 at the time of my separation. Can I use the early distribution exemption for separation with my employer to waive the 10% tax penalty?  I've already paid the mandatory 20% tax plus an extra 2% when I withdrew my funds. 

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Level 15

Early distribution of 401K penalty exceptions

You have to be age 55 in or after the year of separation from the company that held the 401k to be exempt from the 10% early withdrawal penalty.

IRS Tax Topic 558 - https://www.irs.gov/taxtopics/tc558

The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55

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Level 15

Early distribution of 401K penalty exceptions

So the answer is No, you do not qualify for the age-55 exception for distributions from the 401(k) provided by the employer from which you separated from service in the year prior to the year that you reached age 55.

Your wife's age is not relevant to penalty exceptions for distributions from your retirement accounts.
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New Member

Early distribution of 401K penalty exceptions

Interestingly, Turbotax will cause you to make an error in some cases.  If you indicate that you have made an early withdrawal, it looks for ways to reduce the tax bill.  One option it allows you to specify is "Separation from service the year during or after age 55".  If you choose this, it eliminates the 10% penalty.  That should not be allowed if the withdrawal was from a previous employer, but Turbotax doesn't ask whether it's the current or a former employer.