@401kBasics Plan Sponsor Quick Tips: 10% Early Penalty Exception

Each Monday 401kBasics posts a new tip as a part of our series “Plan Sponsor Quick Tips”. This series is designed to assist plan sponsors in filling their fiduciary role and running their retirement plan efficiently. Your feedback or suggestions on future articles is welcome.

Did you know that not all distribution payments made to a qualified plan participant are subject to the 10% early withdrawal penalty? The exception is contingent on the participant separating from service with employer during or after the year they reach age 55.  A few examples include:

  • A distribution payment to a terminated participant at age 58 is exempt.
  • A distribution payment to a terminated participant in the year they turn age 55 is exempt.
  • A participant who terminates from service at age 51 but requests a distribution payment at age 55 is not exempt.

As you can see there are several scenarios that allow a terminated participant to take a distribution without the 10% penalty before the age of 59.5. You may contact your service provider for further information on this topic.

This site is for entertainment purposes only. 401kBasics and it’s authors are not financial advisors and no information found on this site should be construed as financial advice.

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