Would my 401k withdrawals be exempt from early withdrawal penalty if I leave my current employer in Jan of next year even though I don’t actually turn 55 until September?

[tagteam]

I'll page @dmertz so check back here later.

[dmertz]

There seems to be disagreement on this subject.  Section 72(t)(2)(A)(v) of the tax code says this exception applies when the distribution is:

(v)made to an employee after separation from service after attainment of age 55

However, IRS Notice 87-13 says:

A distribution to an employee from a qualified plan will be treated as within section 72(t)(2)(A)(v) if (i) it is made after the employee has separated from service for the employer maintaining the plan and (ii) such separation from service occurred during or after the calendar year in which the employee attained age 55.

[TimKr33]

Thank you for the reply. I wish the IRS guidance was clearer for something this important.

The company that manages my 401K provided this link to the IRS web site which also appears to indicate that I could separate any time in the year I turn 55 and be exempt from the early withdrawal penalty:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-o...

Separation from service

the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit or defined contribution plan)

[dmertz]

You should contact the plan to see how they would code the distribution.  They should used code 2 for a distribution that they believe qualifies for this exception.

[TimKr33]

They just replied to me "Even if you qualify for the exemption, we would still code it at a 1. Then at tax time you would work with a tax advisor who can show that you are exempt from that penalty."

My 'tax advisor' is usually TurboTax. Hopefully TurboTax lets me show that I am exempt from the penalty.

[dmertz · Accepted solution]

On the page were TurboTax allows you to make entries to potentially reduce the penalty there is a box for you to enter the amount that you deem to be eligible for this exception.  With that entry having been made, TurboTax will populate line 2 of Form 5329 with that amount and code 01.