Is a 401k withdrawal using the rule of 55 where there is no early withdrawal penalty considered an early withdrawal? (i ask because Miss. doesn't tax 401k plan dist)

[Opus 17]

To not pay a 10% penalty for early withdrawal from a 401k, you must be 59-1/2, or you separated from service from that employer in the year you turn 55 or older.   That means that if you are 55, but you are withdrawing from a plan sponsored by an employer you quit when you were 45, you don't meet the rule and you do owe the penalty.   You only meet the rule if you separated from the employed that sponsored that plan at age 55 or older. 

The income is still taxable as regular income, of course.

[hollywide67]

Thanks. I’m over 55 but younger than 59 1/2 and separated from job. Since Mississippi doesn’t tax 401k distributions I wanted to know if this withdrawal would be considered early or just a regular distribution. 

[Opus 17]

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@hollywide67 wrote:

Thanks. I’m over 55 but younger than 59 1/2 and separated from job. Since Mississippi doesn’t tax 401k distributions I wanted to know if this withdrawal would be considered early or just a regular distribution. 

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It's a regular distribution under federal law.  The Mississippi instructions say that if a withdrawal is not considered early under federal law, then it is also not considered early in Mississippi.

[Rodger4]

Can the rule of 55 be used if you leave the company just before your 55th Birthday? For example, on April 1st a person leaves and  is 54 and 11 months.

[DawnC]

Yes.  As Opus states above, to not pay a 10% penalty for early withdrawal from a 401k, you must be 59-1/2, or you separated from service from that employer in the year you turn 55 or older.  The separation of service rule states that if an employee, who is participating in a company retirement plan such as a 401(k) plan, leaves the employer during the year in which they turn age 55 or older, distributions from the retirement plan are not subject to the additional 10 percent tax penalty.  @Rodger4 

[Rodger4]

Thank You