Rule of 55 and 401k rollovers

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SunRainSnow
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Rule of 55 and 401k rollovers

Post by SunRainSnow »

Hypothetical question for future planning.

Say one has a 401k and leaves Company A where it was offered but leaves before the year they turn 55. Then they join Company B some time in the future. If the old, Company A, 401k balance is rolled over into the new, Company B, 401k plan and Company B plan has the rule of 55 in place can the holder withdraw the money from the rollover if they leave the company the year (or after) they turn 55?
HomeStretch
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Re: Rule of 55 and 401k rollovers

Post by HomeStretch »

Yes, the Company A 401k balance rolled over into Company B’s 401k plan is available for distribution under the ‘Rule of 55’ if you separate from Company B at age 55+.
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SunRainSnow
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Re: Rule of 55 and 401k rollovers

Post by SunRainSnow »

Wonderful thank you for the reply. This would be one advantage of leaving the 401k where it is as opposed to rolling into an IRA as is often advised I think. Even if you lose some efficiency in higher fees the ability to put it into another 401k and withdraw it when you are +55 must have some value over losing that ability if you roll it into an IRA as I don't think you can roll the IRA into a 401k correct?
HomeStretch
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Re: Rule of 55 and 401k rollovers

Post by HomeStretch »

A 401k plan may, but is not required to, allow rollovers in from traditional/rollover IRAs. Check your 401k plan document.

Leaving the funds in a 401k plan rather than rolling over to an IRA may also be beneficial if your income (now or in the future) exceeds the limit to directly contribute to a Roth IRA and you want to utilize a backdoor Roth. A 401k account has better legal protections, how much better depends on your state.

If you are depending on being able to use the ‘Rule of 55’ to access Company A 401k funds, consider rolling the funds into Company B’s 401k now (if costs are lower or better fund choices) or when you get near to age 55 (in case of unexpected job separation).
Topic Author
SunRainSnow
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Re: Rule of 55 and 401k rollovers

Post by SunRainSnow »

HomeStretch wrote: Thu Jun 10, 2021 5:24 am A 401k plan may, but is not required to, allow rollovers in from traditional/rollover IRAs. Check your 401k plan document.

Leaving the funds in a 401k plan rather than rolling over to an IRA may also be beneficial if your income (now or in the future) exceeds the limit to directly contribute to a Roth IRA and you want to utilize a backdoor Roth. A 401k account has better legal protections, how much better depends on your state.

If you are depending on being able to use the ‘Rule of 55’ to access Company A 401k funds, consider rolling the funds into Company B’s 401k now (if costs are lower or better fund choices) or when you get near to age 55 (in case of unexpected job separation).
Thanks for the reply. For now the question is theoretical only. I'm still at Company A but plan to leave sometime in the next 18 months or so, retirement or sabbatical (unknown at this time). There is no Company B at this point but if I did want (or need) to return to the workforce it may be worth keeping the Company A 401k where it is (fund and fees are OK) to give me that flexibility in the future.
LeslieSmiley
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Re: Rule of 55 and 401k rollovers

Post by LeslieSmiley »

SunRainSnow wrote: Thu Jun 10, 2021 6:53 am
HomeStretch wrote: Thu Jun 10, 2021 5:24 am A 401k plan may, but is not required to, allow rollovers in from traditional/rollover IRAs. Check your 401k plan document.

Leaving the funds in a 401k plan rather than rolling over to an IRA may also be beneficial if your income (now or in the future) exceeds the limit to directly contribute to a Roth IRA and you want to utilize a backdoor Roth. A 401k account has better legal protections, how much better depends on your state.

If you are depending on being able to use the ‘Rule of 55’ to access Company A 401k funds, consider rolling the funds into Company B’s 401k now (if costs are lower or better fund choices) or when you get near to age 55 (in case of unexpected job separation).
Thanks for the reply. For now the question is theoretical only. I'm still at Company A but plan to leave sometime in the next 18 months or so, retirement or sabbatical (unknown at this time). There is no Company B at this point but if I did want (or need) to return to the workforce it may be worth keeping the Company A 401k where it is (fund and fees are OK) to give me that flexibility in the future.
Also, check your plan on terms in withdrawal. Some plans have the following withdrawal rules:

- annuilize the entire account balance monthly
- withdraw a portion of the balance but if you do that, you would then have to rollover the remainder of the balance into an IRA at the same time
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SunRainSnow
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Re: Rule of 55 and 401k rollovers

Post by SunRainSnow »

Also, check your plan on terms in withdrawal. Some plans have the following withdrawal rules:

- annuilize the entire account balance monthly
- withdraw a portion of the balance but if you do that, you would then have to rollover the remainder of the balance into an IRA at the same time
I'm not entirely sure I understand what either of those actually mean in practice.
sailaway
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Re: Rule of 55 and 401k rollovers

Post by sailaway »

Are there more plans that allow you roll in prior 401ks than those that allow IRAs? I would have thought most that allow roll ins allow both?
Lionel Hutz
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Re: Rule of 55 and 401k rollovers

Post by Lionel Hutz »

SunRainSnow wrote: Thu Jun 10, 2021 11:16 am
Also, check your plan on terms in withdrawal. Some plans have the following withdrawal rules:

- annuilize the entire account balance monthly
- withdraw a portion of the balance but if you do that, you would then have to rollover the remainder of the balance into an IRA at the same time
I'm not entirely sure I understand what either of those actually mean in practice.
Meaning not all plans allow one time distributions of amounts less than the full balance, or “partial withdrawals”.

Some only allow a) regular monthly withdrawals, and/or b) total distribution of 100% of the account.

If that’s the case you’d still have one shot at an “age of 55 distribution”, but be forced to do something with the rest of the funds at the same time since you can’t leave it in the plan, ie roll it to an IRA. Worth noting IRAs don’t have this age of 55 rule.
Lionel Hutz
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Re: Rule of 55 and 401k rollovers

Post by Lionel Hutz »

sailaway wrote: Thu Jun 10, 2021 11:21 am Are there more plans that allow you roll in prior 401ks than those that allow IRAs? I would have thought most that allow roll ins allow both?
It’s up to each employer. Generally, allowing rollovers of 401ks is most common, then rollover/conduit IRAs second, then traditional/contributory IRAs last.

All are legal in the IRS’s eyes, but each plan sets their terms.
LeslieSmiley
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Re: Rule of 55 and 401k rollovers

Post by LeslieSmiley »

Lionel Hutz wrote: Thu Jun 10, 2021 11:46 am
SunRainSnow wrote: Thu Jun 10, 2021 11:16 am
Also, check your plan on terms in withdrawal. Some plans have the following withdrawal rules:

- annuilize the entire account balance monthly
- withdraw a portion of the balance but if you do that, you would then have to rollover the remainder of the balance into an IRA at the same time
I'm not entirely sure I understand what either of those actually mean in practice.
Meaning not all plans allow one time distributions of amounts less than the full balance, or “partial withdrawals”.

Some only allow a) regular monthly withdrawals, and/or b) total distribution of 100% of the account.

If that’s the case you’d still have one shot at an “age of 55 distribution”, but be forced to do something with the rest of the funds at the same time since you can’t leave it in the plan, ie roll it to an IRA. Worth noting IRAs don’t have this age of 55 rule.
As Lionel Hutz stated.

Since once the money is rolled over to the IRA, you can’t touch it without paying a penalty before the age of 59.5, so if your plan doesn’t allow partial withdrawal and keep the remainder of the balance in the plan, you would need to figure out if the amount that you plan to withdraw would be enough to last until you reach age 59.5 and at that point, you can withdraw from your IRA without penalty.
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SunRainSnow
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Re: Rule of 55 and 401k rollovers

Post by SunRainSnow »

Thanks for pointing this possible caveat of the rule of 55 out to me. Somewhat naively I had assumed I could pull from the 401k as and when I needed the money if it allowed the rule of 55 and indeed I was +55. So it may be a case I'd have to possibly withdraw several years of expenses (if it were to tied me over until I could access my IRA at 59.5) and that would be taxed all in one year as opposed to spreading it out over a few years.
LeslieSmiley
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Re: Rule of 55 and 401k rollovers

Post by LeslieSmiley »

SunRainSnow wrote: Thu Jun 10, 2021 12:32 pm Thanks for pointing this possible caveat of the rule of 55 out to me. Somewhat naively I had assumed I could pull from the 401k as and when I needed the money if it allowed the rule of 55 and indeed I was +55. So it may be a case I'd have to possibly withdraw several years of expenses (if it were to tied me over until I could access my IRA at 59.5) and that would be taxed all in one year as opposed to spreading it out over a few years.
I think the rationale is that your previous employer pays for fees of the plan and every time you make a withdrawal, the transaction incurs fee and your previous employer has to pay for it. Since you're no longer an active employee, your previous employer does not want to continue to absorb those fees generated by your continuous transactions.
Stuckinmn
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Re: Rule of 55 and 401k rollovers

Post by Stuckinmn »

This brings up an interesting possible loophole.

Could you retire at 50, leave the previous employer's 401ks in place, then at 55 open up a solo 401k for your new "business" (go mow neighbor's lawn and have him pay you $20). Move old 401k over to solo 401k, retire at 55 and have full access to the funds. Of course, your solo plan would have to allow it, but it's your plan.

At that point it might be easier to just do a 72t, but it's an intriguing option to get access to more retirement funds earlier if you could do it without getting in hot water.
LeslieSmiley
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Re: Rule of 55 and 401k rollovers

Post by LeslieSmiley »

Stuckinmn wrote: Thu Jun 10, 2021 11:19 pm This brings up an interesting possible loophole.

Could you retire at 50, leave the previous employer's 401ks in place, then at 55 open up a solo 401k for your new "business" (go mow neighbor's lawn and have him pay you $20). Move old 401k over to solo 401k, retire at 55 and have full access to the funds. Of course, your solo plan would have to allow it, but it's your plan.

At that point it might be easier to just do a 72t, but it's an intriguing option to get access to more retirement funds earlier if you could do it without getting in hot water.
I think the rule only applies if you leave your job DURING or AFTER the calendar year you turn 55.
retiredjg
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Re: Rule of 55 and 401k rollovers

Post by retiredjg »

Stuckinmn wrote: Thu Jun 10, 2021 11:19 pm This brings up an interesting possible loophole.

Could you retire at 50, leave the previous employer's 401ks in place, then at 55 open up a solo 401k for your new "business" (go mow neighbor's lawn and have him pay you $20). Move old 401k over to solo 401k, retire at 55 and have full access to the funds. Of course, your solo plan would have to allow it, but it's your plan.

At that point it might be easier to just do a 72t, but it's an intriguing option to get access to more retirement funds earlier if you could do it without getting in hot water.
In the example as given, I think your hot water would be opening the Solo 401k based on a fake business. My understanding is that it is supposed to be real self employment that either has shown a profit in the past or is showing a profit. Then after opening the plan, you'd have to stop being self-employed to use the "55" exception.

With real self employment income, it is an interesting question. I understand that a Solo 401k is supposed to be terminated within a certain time period when the self-employment ends. What does that mean? Does it have to be rolled to IRA at that point? If yes, the rule of 55 is not going to do you much good.
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David Jay
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Re: Rule of 55 and 401k rollovers

Post by David Jay »

SunRainSnow wrote: Thu Jun 10, 2021 12:32 pm Thanks for pointing this possible caveat of the rule of 55 out to me. Somewhat naively I had assumed I could pull from the 401k as and when I needed the money if it allowed the rule of 55 and indeed I was +55. So it may be a case I'd have to possibly withdraw several years of expenses (if it were to tied me over until I could access my IRA at 59.5) and that would be taxed all in one year as opposed to spreading it out over a few years.
This is commonly overlooked in a discussion of the rule of 55. One needs to review the Summary Plan Description (SPD) of the particular 401K plan.

HR will normally have the SPD readily available (ours was posted in the HR section of the company Intranet) and are required to provide it upon request. The key information that one needs is whether the plan provides for “partial distributions” after separation from service before age 59.5
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
sc9182
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Re: Rule of 55 and 401k rollovers

Post by sc9182 »

retiredjg wrote: Fri Jun 11, 2021 7:46 am
Stuckinmn wrote: Thu Jun 10, 2021 11:19 pm This brings up an interesting possible loophole.

Could you retire at 50, leave the previous employer's 401ks in place, then at 55 open up a solo 401k for your new "business" (go mow neighbor's lawn and have him pay you $20). Move old 401k over to solo 401k, retire at 55 and have full access to the funds. Of course, your solo plan would have to allow it, but it's your plan.

At that point it might be easier to just do a 72t, but it's an intriguing option to get access to more retirement funds earlier if you could do it without getting in hot water.
In the example as given, I think your hot water would be opening the Solo 401k based on a fake business. My understanding is that it is supposed to be real self employment that either has shown a profit in the past or is showing a profit. Then after opening the plan, you'd have to stop being self-employed to use the "55" exception.

With real self employment income, it is an interesting question. I understand that a Solo 401k is supposed to be terminated within a certain time period when the self-employment ends. What does that mean? Does it have to be rolled to IRA at that point? If yes, the rule of 55 is not going to do you much good.
Haven’t researched this possibility — but would IRS often have some rules on 5% ownership!? (Similar to RMD rules - preventing 5% owners using RMD delay-process), dunno !
retiredjg
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Re: Rule of 55 and 401k rollovers

Post by retiredjg »

I have no idea. :happy
LeslieSmiley
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Re: Rule of 55 and 401k rollovers

Post by LeslieSmiley »

LeslieSmiley wrote: Fri Jun 11, 2021 6:18 am
Stuckinmn wrote: Thu Jun 10, 2021 11:19 pm This brings up an interesting possible loophole.

Could you retire at 50, leave the previous employer's 401ks in place, then at 55 open up a solo 401k for your new "business" (go mow neighbor's lawn and have him pay you $20). Move old 401k over to solo 401k, retire at 55 and have full access to the funds. Of course, your solo plan would have to allow it, but it's your plan.

At that point it might be easier to just do a 72t, but it's an intriguing option to get access to more retirement funds earlier if you could do it without getting in hot water.
I think the rule only applies if you leave your job DURING or AFTER the calendar year you turn 55.
Two additional points:

- you can only withdraw the fund based on the 55 rule if the money remains in the original previous employers 401k plan

- the 55 rule doesn't apply to solo 401k
retiredjg
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Re: Rule of 55 and 401k rollovers

Post by retiredjg »

LeslieSmiley wrote: Fri Jun 18, 2021 8:09 am - the 55 rule doesn't apply to solo 401k
I was wondering about that. Didn't feel quite right to me because of the termination requirement.
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