Outside voices and views for advisers

Clients facing late-career job loss can tap 401(k)s early

The 'age 55 rule' is a little-known strategy that provides income without the IRS penalty

Oct 27, 2017 @ 4:25 pm

By Gina Bolvin and William Bernarduci

The unemployment rate continues to tick down, close to what many economists consider the level of full employment. That's a testament to both the relative strength of the economy and business' willingness to hire.

For sure, the recovery from the financial crisis was sometimes – and, in some cases, continues to be – frustratingly slow, but the U.S. labor market is undoubtedly healthy, and post crisis it's never been easier for qualified workers to find a job.

Nevertheless, layoffs, as we all know, are a fact of life. Countless newspapers, for instance, have been forced to slash jobs in recent years, as have firms in a host of other declining industries. Even prosperous companies such as Microsoft have announced layoffs this year. When cutbacks occur, typically it's the most senior employees who feel the brunt of it, since they tend to make more money than their younger colleagues, which provides companies the best opportunity to save.


When clients are confronted with a job loss, they often look to their 401(k)s and IRAs to obtain additional income to cover their expenses. Many have saved a substantial amount but early withdrawals come with taxes and penalties. Often, a client's best option depends on their age rather than their account value.

At 59 and a half, a client can take penalty-free withdrawals from their retirement savings. However, a withdrawal from an IRA or 401(k) before that age may be subject to an additional 10% penalty – one of the last things an unemployed worker needs. There are some solutions.

For those under 59 and a half, help can be found in the so-called "Age 55 Rule," a little-known IRS exception. In fact, many advisers and even some tax specialists are unaware of it. The Age 55 Rule allows individuals who separate from their company at age 55 or older to take penalty-free withdrawals from their 401(k). That's the kicker: the rule doesn't apply if the plan participant rolls over their 401(k) into an IRA.


The Age 55 Rule offers employees a flexible way to cover their income needs. Under the rule, a former employee or retiree can withdraw as much or a little as they want. Notably, how an employee separates from the company doesn't matter. The rule applies whether an employee was laid off, resigned or fired. These penalty-free distributions can help a client transition to a new job or bridge the gap until they reach 59 and a half.

It's important to be well-versed in the Age 55 Rule, particularly in light of the DOL's newly introduced "best interest" standard. In many circumstances, a client may save thousands of dollars in unnecessary penalties by keeping some or all of their retirement savings in their employer's 401(k).

For advisers, this is the right thing to do – even though it likely means missing out on some opportunities to capture rollover assets. Advising clients on the benefits of this IRS exception adds significant value by providing a helpful safety net and income strategy when clients need it most.

Gina Bolvin is President of Bolvin Wealth Management Group. William Bernarduci, J.D., is a wealth adviser there.


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