What the IRS table shows
| Where the money sits | Leave the employer at 55 or later | Age 59½ or older |
|---|---|---|
| Employer 401(k) or similar qualified plan | Exception applies | Exception applies |
| IRA, SEP or SIMPLE IRA, including an IRA annuity | Exception does not apply | Exception applies |
The separation-from-service exception covers an employee who leaves their employer during or after the year they reach 55 (50 for certain public safety employees in governmental plans). Source: IRS exceptions table and IRS Topic 558.
Why this matters for a rollover
Say you leave your job at 56 and roll the 401(k) into an IRA annuity. At 57, you need money. A 401(k) withdrawal could have avoided the 10% additional tax, but an IRA withdrawal at 57 would face it unless another exception applies. The annuity can add a second cost if you take more than the contract allows without a surrender charge. The exception only affects the 10% additional tax, and withdrawals are still taxed as income.
The traps
- The exception does not follow the money. Once the money is in an IRA, the table shows no age-55 exception for it.
- Stacking costs. A pre-59½ withdrawal from an IRA annuity can mean income tax, the 10% additional tax and a surrender charge at the same time.
- Your plan type. The IRS table lists the exception for qualified plans. Ask your tax professional whether your specific plan, such as a 403(b), qualifies.
- Governmental 457(b). These plans generally are not subject to the 10% additional tax at all, which is a separate advantage that also does not follow into an IRA (IRS Topic 558: Additional tax on early distributions from retirement plans other than IRAs).
Ways people handle it
Some people roll only part of the plan to an IRA annuity and leave a bridge amount in the plan for the years before 59½. Whether your plan lets you keep money there after you leave, and how withdrawals work, is in the plan document, so ask your plan administrator. See every rollover account at a glance.
Between 55 and 59½? Check the timeline before you roll.
Request a no-obligation Retirement Income Review. We explain your options in plain English, with no pressure and no promises of returns.
Request my Retirement Income ReviewQuestions to ask
- In what year did or will I leave this employer?
- Does my plan allow me to keep money there and take withdrawals after I leave?
- Do I expect to need money before 59½?
- What surrender charge would apply to a withdrawal from the annuity, and what free withdrawal amount is allowed?
Related reading
See your 401(k) options, 457(b) rollovers and 403(b) rollovers.
Where to check these rules
Every rule on this page comes from the IRS. Read the source for your situation:
- IRS: Exceptions to tax on early distributions
- IRS Topic 558: Additional tax on early distributions from retirement plans other than IRAs
- IRS: Rollovers of retirement plan and IRA distributions
Availability and rules vary by state
Life insurance and annuity products, rates, riders and consumer protections differ by state, and a given product may not be available in every state. Honorbrook is licensed in the 11 states below; which products we can offer you depends on what carriers sell in your state. Each state’s insurance regulator can verify an agent’s license and answer consumer questions.
- Virginia: Virginia Bureau of Insurance
- Maryland: Maryland Insurance Administration
- North Carolina: North Carolina Department of Insurance
- South Carolina: South Carolina Department of Insurance
- Georgia: Georgia Office of Insurance and Safety Fire Commissioner
- Alabama: Alabama Department of Insurance
- Louisiana: Louisiana Department of Insurance
- Texas: Texas Department of Insurance
- Michigan: Michigan Department of Insurance and Financial Services
- Indiana: Indiana Department of Insurance
- West Virginia: West Virginia Offices of the Insurance Commissioner
This article is general information and is not tax, legal, investment or financial advice. Annuity guarantees depend on the issuing company’s claims-paying ability, and surrender charges and fees may apply. A licensed agent can help with your situation.