withdrawing at age 55..whats penalty free?

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jack1719
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withdrawing at age 55..whats penalty free?

Post by jack1719 » Sun Feb 26, 2012 9:11 pm

I work for NY state/Goverment and have a 25/55 defined pension plan...I can fully retire at 55 with just about 60%..

I also have a traditional tax deffered 401K(that the retirement HR booklet says I can withdraw from penalty free at age 55 if I fully retire from service..

I also have a Roth 401K that I have been contributing to for about 2 years(since they began offering it).. would that follow the same stipulation as the tax deffered 401k in regards to penalty free withdrawls at 55?

I also have a Roth IRA..That I am pretty sure is 59 1/2 no matter if I retire from service or not right?

Thanks for listening and the Help :)

Alan S.
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Re: withdrawing at age 55..whats penalty free?

Post by Alan S. » Sun Feb 26, 2012 9:44 pm

The age 55 separation from service exception applies to qualified employer plans, but NOT to IRAs of any type. It applies only to the plan sponsored by the firm you are separating from, not to other plan balances with prior employers.

Your Roth 401k is a qualified plan, so the exception applies there also. For example, earnings come out pro rated with contributions, and the exception would avoid the penalty on the taxable portion of any Roth 401k distributions.

Note that you do not actually have to reach 55 when you separate from service. The exception applies if you separate anytime in the calendar year in which you reach 55. So if your birthday is in November, you could leave now and still get the exception.

livesoft
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Re: withdrawing at age 55..whats penalty free?

Post by livesoft » Sun Feb 26, 2012 9:48 pm

Could you separate in calendar year when you reach age 57 and still withdraw penalty-free? That is, is it age 55 only and no other ages?
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MathWizard
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Re: withdrawing at age 55..whats penalty free?

Post by MathWizard » Sun Feb 26, 2012 9:50 pm

You can withdraw contributions to a ROTH IRA at any time, I think that ROTH conversions
may have some time limit after conversion.

There is also the 72t rule which requires substantial equal period withdrawals
for 5 years or until 59 1/2 whichever is later.

sscritic
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Re: withdrawing at age 55..whats penalty free?

Post by sscritic » Sun Feb 26, 2012 9:53 pm

livesoft wrote:Could you separate in calendar year when you reach age 57 and still withdraw penalty-free? That is, is it age 55 only and no other ages?
Only if you separate before your 57th birthday. After your birthday, it is too late and you have to wait for 59 1/2. :)

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VictoriaF
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Re: withdrawing at age 55..whats penalty free?

Post by VictoriaF » Sun Feb 26, 2012 9:54 pm

MathWizard wrote:You can withdraw contributions to a ROTH IRA at any time, I think that ROTH conversions
may have some time limit after conversion.

There is also the 72t rule which requires substantial equal period withdrawals
for 5 years or until 59 1/2 whichever is later.
While one can withdraw from a Roth IRA without a penalty, it is a kind of an account that is best not touched for as long as possible.

On the other hand, if one is retiring starting the year one turns 55, one can withdraw from the regular 401(k) of the employer.

Victoria
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VictoriaF
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Re: withdrawing at age 55..whats penalty free?

Post by VictoriaF » Sun Feb 26, 2012 10:04 pm

sscritic wrote:
livesoft wrote:Could you separate in calendar year when you reach age 57 and still withdraw penalty-free? That is, is it age 55 only and no other ages?
Only if you separate before your 57th birthday. After your birthday, it is too late and you have to wait for 59 1/2. :)
You are joking, but I wonder how many people have understood the joke. For those who have not, here is the TSP rule:
TSP wrote:If you receive a TSP withdrawal payment before you reach age 59½, in addition to the regular income tax, you may have to pay an early withdrawal penalty tax equal to 10% of any portion of the payment not transferred or rolled over. However, if you are age 55 or older in the year you separate or retire, the 10% early withdrawal penalty tax does not apply.
401(k) rules are similar.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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Re: withdrawing at age 55..whats penalty free?

Post by sscritic » Sun Feb 26, 2012 10:07 pm

livesoft's post was the joke. I was just helping out. Wasn't the :) a clue?

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Re: withdrawing at age 55..whats penalty free?

Post by Alan S. » Sun Feb 26, 2012 10:09 pm

Note that if you roll your IRA into the qualified plan and then separate with the age 55 exception, all those former IRA assets are also available for penalty free distribution.

But the value of this exception is functionally limited if the plan does not allow you to take periodic and/or flexible distributions. If you had to take a lump sum, the ordinary income tax hit could be worse than the 10% penalty would be. However, if the plan allows you to take flexible distributions after age 55 separation, you can avoid the rigid requirements of a "SEPP" (substantially equal peridic payments), and should NOT roll the qualified plan to an IRA. Once you reach 59.5, you can then do a direct rollover to an IRA since the penalty is no longer an issue.

Note: a 457b is a non qualified plan and therefore does not have a penalty. But if you roll over plan assets into the 457b, they are NOT treated as 457b assets with respect to Sec 72t. For these other assets in the 457b plan at separation:
1) No penalty if you separate at 55 or later
2) If you separate earlier, the penalty on the other plan assets applies
Last edited by Alan S. on Sun Feb 26, 2012 10:12 pm, edited 1 time in total.

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VictoriaF
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Re: withdrawing at age 55..whats penalty free?

Post by VictoriaF » Sun Feb 26, 2012 10:11 pm

sscritic wrote:livesoft's post was the joke. I was just helping out. Wasn't the :) a clue?
When you know the answer, it is a clue. When you don't know the answer (and I am not talking about you, or me, or lifesoft), it's a "tough luck" emotion or "those government rules" emotion.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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Re: withdrawing at age 55..whats penalty free?

Post by materielgrrl0608 » Sun Feb 26, 2012 10:15 pm

VictoriaF wrote:
sscritic wrote:
livesoft wrote:Could you separate in calendar year when you reach age 57 and still withdraw penalty-free? That is, is it age 55 only and no other ages?
Only if you separate before your 57th birthday. After your birthday, it is too late and you have to wait for 59 1/2. :)
You are joking, but I wonder how many people have understood the joke. For those who have not, here is the TSP rule:
TSP wrote:If you receive a TSP withdrawal payment before you reach age 59½, in addition to the regular income tax, you may have to pay an early withdrawal penalty tax equal to 10% of any portion of the payment not transferred or rolled over. However, if you are age 55 or older in the year you separate or retire, the 10% early withdrawal penalty tax does not apply.
401(k) rules are similar.

Victoria
It's the same rule. TSP does not have a special rule or exemption from 72t; 72t rules are applied to the TSP as they are for other employer DC and DB plans.

555
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Re: withdrawing at age 55..whats penalty free?

Post by 555 » Sun Feb 26, 2012 10:49 pm

sscritic wrote:
livesoft wrote:Could you separate in calendar year when you reach age 57 and still withdraw penalty-free? That is, is it age 55 only and no other ages?
Only if you separate before your 57th birthday. After your birthday, it is too late and you have to wait for 59 1/2. :)
I'm gonna say don't kid around with this, either of you. The :) is not a hint. The ludicrousness of the "rule" is a hint, but not a strong enough one.

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Re: withdrawing at age 55..whats penalty free?

Post by sscritic » Sun Feb 26, 2012 11:11 pm

555 wrote:
sscritic wrote:
livesoft wrote:Could you separate in calendar year when you reach age 57 and still withdraw penalty-free? That is, is it age 55 only and no other ages?
Only if you separate before your 57th birthday. After your birthday, it is too late and you have to wait for 59 1/2. :)
I'm gonna say don't kid around with this, either of you. The :) is not a hint. The ludicrousness of the "rule" is a hint, but not a strong enough one.
Here's a suggestion. If you are about to make a big financial move with large tax consequences, read what the IRS has to say about it, not what a bunch of anonymous people on the internet have to say. If the anonymous person gives you a quote from the IRS with a link to the publication, follow the link. That's where you should get your information. When I give serious answers, I provide quotes from and links to official sources. I know a lot of posters just make stuff up; they think they know, but they don't; and when challenged, they can't find a reference. In that regard, my post was typical for this place. The difference is that mine was clearly marked as being nonsense (I don't know how else to interpret the ludicrousness of my rule and the :) ); most posters however forget to mark their posts as "Ignore me; I just made this up." If you want to read a bunch of bad posts, read almost any of the threads on I bonds. Out of hundreds of posts, very few reference the Code of Federal Regulations where the rules are laid out; my posts and Mel's posts do, but most people just make stuff up (I know, they heard if from their cleaning lady, so that makes it authoritative).

Seriously, what percentage of "factual" posts around here do you think contain errors? I would guess it is 50% or higher. I make mistakes talking about social security. Others who seem knowledgeable about taxes make mistakes about taxes. That's a fact of internet life; don't believe what you read. Alan S. gives serious answers, and he may even be batting 100%, but I wouldn't know if he is correct on a specific topic unless I found a reference to back him up. It's not that I don't believe him (and others), it's just that I want to see it in official IRS print before I commit.

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Re: withdrawing at age 55..whats penalty free?

Post by livesoft » Sun Feb 26, 2012 11:40 pm

@jenny345, thanks, your IRS link shows it's "in or after the year you reached age 55 ...." That answers my question.

Why do so many people leave off the "or after"? That's a rhetorical question, so folks don't really have to answer it unless they want to wax eloquently about it, maybe as a haiku or something. :)
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Re: withdrawing at age 55..whats penalty free?

Post by masteraleph » Mon Feb 27, 2012 12:12 am

As a note- you should really look into whether contributing to a Roth 401k is a good idea in your circumstances. IIRC your NY state pension would be tax free on the federal level, which would mean you'd have very low levels of taxable income. It might be better to avoid paying taxes now and pay them (in low brackets) later on.

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VictoriaF
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Re: withdrawing at age 55..whats penalty free?

Post by VictoriaF » Mon Feb 27, 2012 7:59 am

sscritic wrote:If you are about to make a big financial move with large tax consequences, read what the IRS has to say about it, not what a bunch of anonymous people on the internet have to say. If the anonymous person gives you a quote from the IRS with a link to the publication, follow the link. That's where you should get your information. When I give serious answers, I provide quotes from and links to official sources.
The issue here is not that a prudent investor should not trust anonymous people on the Internet. The issue is that when people read discussion boards such as this one, they develop mental models of other posters. A poster sscritic has provided a significant volume of useful information here, and frequent readers have become conditioned to trust his information. If a new poster makes a pronouncement that does not make sense, his information is challenged; if sscritic makes a pronouncement that does not make sense, the initial reaction is that sscritic knows something that the reader does not.

In fact, sscritic has demonstrated on numerous occasions that simple logic frequently does not work. It is entirely conceivable that the rule of the 57th birthday could be one of those anachronistic features of the tax code that sscritic has dug out the black hole.

Victoria
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FabLab
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Re: withdrawing at age 55..whats penalty free?

Post by FabLab » Mon Feb 27, 2012 12:17 pm

VictoriaF wrote:
sscritic wrote:If you are about to make a big financial move with large tax consequences, read what the IRS has to say about it, not what a bunch of anonymous people on the internet have to say. If the anonymous person gives you a quote from the IRS with a link to the publication, follow the link. That's where you should get your information. When I give serious answers, I provide quotes from and links to official sources.
The issue here is not that a prudent investor should not trust anonymous people on the Internet. The issue is that when people read discussion boards such as this one, they develop mental models of other posters. A poster sscritic has provided a significant volume of useful information here, and frequent readers have become conditioned to trust his information. If a new poster makes a pronouncement that does not make sense, his information is challenged; if sscritic makes a pronouncement that does not make sense, the initial reaction is that sscritic knows something that the reader does not.

In fact, sscritic has demonstrated on numerous occasions that simple logic frequently does not work. It is entirely conceivable that the rule of the 57th birthday could be one of those anachronistic features of the tax code that sscritic has dug out the black hole.

Victoria
This pronouncement does not make as much sense as it could. In cases where there's consideration of a significant financial move that may carry major tax consequences, one has, I should think, the responsibility to review and reflect on the implications of source documents (CFRs, etc.) first and foremost. "Mental models" of anonymous Internet posters are not suitable substitutes.
The fundamental things apply as time goes by -- Herman Hupfeld

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Re: withdrawing at age 55..whats penalty free?

Post by Sidney » Mon Feb 27, 2012 12:29 pm

VictoriaF wrote: It is entirely conceivable that the rule of the 57th birthday could be one of those anachronistic features of the tax code that sscritic has dug out the black hole.

Victoria
Right, I always thought that the rule of 72 was a retirement age thing. :wink:
I always wanted to be a procrastinator.

jack1719
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Re: withdrawing at age 55..whats penalty free?

Post by jack1719 » Mon Feb 27, 2012 2:38 pm

masteraleph wrote:As a note- you should really look into whether contributing to a Roth 401k is a good idea in your circumstances. IIRC your NY state pension would be tax free on the federal level, which would mean you'd have very low levels of taxable income. It might be better to avoid paying taxes now and pay them (in low brackets) later on.

Tax free on federal level? I know it would be NY state tax free if I lived there after I retire,,,I live in NJ across water right now...

Federal also?I thought I would pay federal taxes on pension no matter any state I lived..

my figuring was I would have about a 40K pension thats is taxable that would fill up bottom rungs of my tax brackets...and to do the rest a 50/50 split evenly between Roths and tax deffered in 401ks and IRA..
Last edited by jack1719 on Mon Feb 27, 2012 2:51 pm, edited 1 time in total.

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VictoriaF
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Re: withdrawing at age 55..whats penalty free?

Post by VictoriaF » Mon Feb 27, 2012 2:46 pm

Sidney wrote:
VictoriaF wrote: It is entirely conceivable that the rule of the 57th birthday could be one of those anachronistic features of the tax code that sscritic has dug out the black hole.

Victoria
Right, I always thought that the rule of 72 was a retirement age thing. :wink:
Either that or 42.:wink:

Victoria
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