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Anonymous
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Do we have to pay a 10% penalty? My wife turned 55 in July 2017 and laid off October 2017. We cashed out her 401K. What about the Age 55 Rule?

Federal Taxes (20%) were taken out before we received cash from her 401K.

The distribution code reflecting on the 1099-r is "1"   Shouldn't the distribution code reflect "2"?

Her plan administrator claims we are not being charged a 10% penalty.  But it shows differently on Turbo Tax.

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Level 6

Do we have to pay a 10% penalty? My wife turned 55 in July 2017 and laid off October 2017. We cashed out her 401K. What about the Age 55 Rule?

No.  Because your wife made the qualified plan distribution after age 55, there is an Exception to the early distribution 10% penalty.

Click this IRS link Retirement Topics -  Exceptions to Tax on Early Distributions to see all possible exceptions available.  Form 5329 must be completed to claim a penalty exception.

Follow this path to complete Form 5329 in TurboTax:  

Federal Taxes>>Other Tax Situations>>Additional Tax Payments>>Extra Tax on Early Retirement Withdrawals>>Start.

Note:  Public Safety Officers can qualify for the exception at age 50.

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Level 6

Do we have to pay a 10% penalty? My wife turned 55 in July 2017 and laid off October 2017. We cashed out her 401K. What about the Age 55 Rule?

No.  Because your wife made the qualified plan distribution after age 55, there is an Exception to the early distribution 10% penalty.

Click this IRS link Retirement Topics -  Exceptions to Tax on Early Distributions to see all possible exceptions available.  Form 5329 must be completed to claim a penalty exception.

Follow this path to complete Form 5329 in TurboTax:  

Federal Taxes>>Other Tax Situations>>Additional Tax Payments>>Extra Tax on Early Retirement Withdrawals>>Start.

Note:  Public Safety Officers can qualify for the exception at age 50.

View solution in original post

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Anonymous
Not applicable

Do we have to pay a 10% penalty? My wife turned 55 in July 2017 and laid off October 2017. We cashed out her 401K. What about the Age 55 Rule?

Thank You for your guidance and taking the time to answer my question.
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Level 15

Do we have to pay a 10% penalty? My wife turned 55 in July 2017 and laid off October 2017. We cashed out her 401K. What about the Age 55 Rule?

Assuming that the plan really is a 401(k) plan and not an IRA-based plan (SEP or SIMPLE IRA, indicated by the IRA/SEP/SIMPLE box being marked on the Form 1099-R provided by the payer), a payer who knows her birthdate (as they should) and her separation date would typically use code 2 when they know that the distribution occurred after separation from service and that she separated from service in or after the year in which she reached age 55.  However, even though they used code 1, she can claim the age 55 exception for the circumstances as TurboTaxCaro described.
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