Rule of 55 is it official?

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voidstar
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Rule of 55 is it official?

Post by voidstar » Tue Jan 23, 2018 2:26 am

My wife is 45 and I am 39. We both have good career jobs with stable companies, both with 401k plans.

My specific question is: How "true" is this "rule of 55" in regards to company sponsored 401k's?

Specifically, our situation is like this: My 401k + RothIRA is ~$600k. Her 401K + RothIRA is ~$90k. [ she started retirement savings a bit later than me; it took me many years to convince her about index funds -- she at least did the company matched portion of her401k ]


She'll reach age 55 before me. Suppose she quit her job in that year (that she turns 55). Could she then withdrawal her full 401k and roll it over into a traditional IRA? Or for rule of 55, does she still have to withdrawal from the company 401k plan? (where she may have limited options, especially in regards to dividend income)

I'm guestimating her 401K could balloon to maybe ~$400K,with max contributions made for the next 10 years. Note a huge amount for retirement by itself -- but she could "float" with that income between age 55 and 59.5 -- at which point, then at age 59.5, she could pull from her RothIRA? (and we also start pulling from my own 401k at about that same time, as I reach age 55)


Aside from also accounting for health care cost -- is there anything I'm missing here? (note, we have no loans currently, and assume we won't then either -- we do have one daughter)



Just exploring the option here, and making sure I understand this "rule of 55" correctly. The way I interpreted this rule as: if you're loyal and stick with a company till age 55 and have a sizeable 401k grown with it, then as a "reward" you can quit at age 55 and use that 401k without penalty (aside from the withdrawals counting as income). [ but sometimes there is bad luck and company folds, so you can still rollover the 401k to your new company which is probably along the same industry of work ]


Any clarification here would be appreciated! Thanks!

anonsdca
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Re: Rule of 55 is it official?

Post by anonsdca » Tue Jan 23, 2018 4:13 am

My understanding also. Retire at 55 and have a company 401K and keep that 401k with CO, you can withdraw Tax free--if you retire after 55. I am counting on this for me. I have:

1) Tax account--anytime -55
2) 401k - 55
3) IRA - 59.5
4) SSN - 62

So my retirement is based on this. Retiring abroad.

nalor511
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Re: Rule of 55 is it official?

Post by nalor511 » Tue Jan 23, 2018 4:23 am

It's not tax free, but it is free of the 10% early withdrawal penalty for being under 59.5 years old.

https://www.irahelp.com/slottreport/age ... ement-plan

The distribution would still be subject to federal (and state) income taxes.

anonsdca
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Re: Rule of 55 is it official?

Post by anonsdca » Tue Jan 23, 2018 4:27 am

nalor511 wrote:
Tue Jan 23, 2018 4:23 am
It's not tax free, but it is free of the 10% early withdrawal penalty for being under 59.5 years old.

https://www.irahelp.com/slottreport/age ... ement-plan

The distribution would still be subject to federal (and state) income taxes.
That makes sense. I didn't really think tax free, just penalty free. Nothing is tax free.

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Leesbro63
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Re: Rule of 55 is it official?

Post by Leesbro63 » Tue Jan 23, 2018 5:08 am

nalor511 wrote:
Tue Jan 23, 2018 4:23 am
It's not tax free, but it is free of the 10% early withdrawal penalty for being under 59.5 years old.

https://www.irahelp.com/slottreport/age ... ement-plan

The distribution would still be subject to federal (and state) income taxes.
Some states tax this and some (like PA) do not.

livesoft
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Re: Rule of 55 is it official?

Post by livesoft » Tue Jan 23, 2018 6:24 am

Update: The following could be incorrect.

Sorry but the age-55-rule is not available in all 401(k) plans. The IRS allows it, but many plans do not implement it. So it turns out that one cannot really get advice about this rule of 55 from an internet forum. One has to check with their own plan administrator and the plan documents themselves. You can also do an internet search to get more opinions, some of which also may not apply to your specific 401(k) plan. That means, you are stuck talking to your plan administrator and reading your plan documents carefully.

Oh, one more thing: It is even likely that your plan administrator may at first give you wrong information, so reading the plan documents carefully is mandatory.
Last edited by livesoft on Tue Jan 23, 2018 7:01 am, edited 1 time in total.
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technovelist
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Re: Rule of 55 is it official?

Post by technovelist » Tue Jan 23, 2018 6:28 am

livesoft wrote:
Tue Jan 23, 2018 6:24 am
Sorry but the age-55-rule is not available in all 401(k) plans. The IRS allows it, but many plans do not implement it. So it turns out that one cannot really get advice about this rule of 55 from an internet forum. One has to check with their own plan administrator and the plan documents themselves. You can also do an internet search to get more opinions, some of which also may not apply to your specific 401(k) plan. That means, you are stuck talking to your plan administrator and reading your plan documents carefully.

Oh, one more thing: It is even likely that your plan administrator may at first give you wrong information, so reading the plan documents carefully is mandatory.
Are you thinking of the "in-service withdrawal" rules? I don't think any company can prevent you from rolling over your 401k balance when you leave their employment.
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Re: Rule of 55 is it official?

Post by livesoft » Tue Jan 23, 2018 6:33 am

technovelist wrote:
Tue Jan 23, 2018 6:28 am
Are you thinking of the "in-service withdrawal" rules? I don't think any company can prevent you from rolling over your 401k balance when you leave their employment.
That is true, but a rollover is not an age-55-rule no penalty withdrawal. I don't know of any age limit to a rollover when you leave your employer.
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Re: Rule of 55 is it official?

Post by KSOC » Tue Jan 23, 2018 7:13 am

anonsdca wrote:
Tue Jan 23, 2018 4:13 am
Retire at 55 and have a company 401K and keep that 401k with CO, you can withdraw Tax free--if you retire after 55. I
voidstar - as others have stated - depends on your company plan. And if you roll over to an IRA BEFORE you reach 59.5 further withdraws will be penalized 10%.

This is where I'm at now. I too was with a "stable" company but my facility was closed. I was 58. The "55" rule was in my plan. Also advise building up those taxable accounts as you get closer to 55. If one gets dropped before 55 you can fall back on some non-restricted funds. We are living on my wife's salary, my severance & a small inheritance just received. In August I turn 59.5 so I also have an IRA available to me if I need funds. Hoping to let the 401k ride a few more years.
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jhfenton
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Re: Rule of 55 is it official?

Post by jhfenton » Tue Jan 23, 2018 7:50 am

You can always count on the "Rule of 72(t)" to allow for pre-59 1/2 penalty-free withdrawals from IRAs. You just have to do a little math to back into the amount to set aside in an IRA you will take your "substantially equal periodic payments" from. You can stop them after the later of 5 years or age 59 1/2, so age 55 would be a great time to start them to get you to 60.

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Re: Rule of 55 is it official?

Post by panhead » Tue Jan 23, 2018 8:06 am

voidstar wrote:
Tue Jan 23, 2018 2:26 am
The way I interpreted this rule as: if you're loyal and stick with a company till age 55 and have a sizeable 401k grown with it, then as a "reward" you can quit at age 55 and use that 401k without penalty (aside from the withdrawals counting as income). [ but sometimes there is bad luck and company folds, so you can still rollover the 401k to your new company which is probably along the same industry of work ]
The thing here is that if you roll your 401k over to another company 401k plan before you turn 55 (say you are 54), and it supports the "rule of 55", you can retire at 55 from the new company and start your penalty free withdrawals. I guess my point here is this has nothing to do with loyalty.

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teen persuasion
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Re: Rule of 55 is it official?

Post by teen persuasion » Tue Jan 23, 2018 9:28 am

voidstar wrote:
Tue Jan 23, 2018 2:26 am
My wife is 45 and I am 39. We both have good career jobs with stable companies, both with 401k plans.

My specific question is: How "true" is this "rule of 55" in regards to company sponsored 401k's?

Specifically, our situation is like this: My 401k + RothIRA is ~$600k. Her 401K + RothIRA is ~$90k. [ she started retirement savings a bit later than me; it took me many years to convince her about index funds -- she at least did the company matched portion of her401k ]


She'll reach age 55 before me. Suppose she quit her job in that year (that she turns 55). Could she then withdrawal her full 401k and roll it over into a traditional IRA?

You can roll your 401k to a traditional IRA whenever you leave an employer, not just at age 55.

Or for rule of 55, does she still have to withdrawal from the company 401k plan? (where she may have limited options, especially in regards to dividend income)

Yes

I'm guestimating her 401K could balloon to maybe ~$400K,with max contributions made for the next 10 years. Note a huge amount for retirement by itself -- but she could "float" with that income between age 55 and 59.5 -- at which point, then at age 59.5, she could pull from her RothIRA? (and we also start pulling from my own 401k at about that same time, as I reach age 55)

You can withdraw contributions (not earnings) from a Roth IRA at any age tax and penalty free.


Aside from also accounting for health care cost -- is there anything I'm missing here? (note, we have no loans currently, and assume we won't then either -- we do have one daughter)

You could use a Roth conversion ladder to access IRA funds penalty free before age 59.5.


Just exploring the option here, and making sure I understand this "rule of 55" correctly. The way I interpreted this rule as: if you're loyal and stick with a company till age 55 and have a sizeable 401k grown with it, then as a "reward" you can quit at age 55 and use that 401k without penalty (aside from the withdrawals counting as income). [ but sometimes there is bad luck and company folds, so you can still rollover the 401k to your new company which is probably along the same industry of work ]

As others mentioned, Rule of 55 may not be implemented by your employer.

Any clarification here would be appreciated! Thanks!

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fishandgolf
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Re: Rule of 55 is it official?

Post by fishandgolf » Tue Jan 23, 2018 9:40 am

The Rule 55 and 72(t) are both great options that allow you to withdrawal from your 401(k) or tIRA without having to pay the 10% penalty. The 72(t) is best used prior to age 55; Rule 55 is best once you turn 55.....and you must be 55....not the year you turn 55.....some adviser confuse this with the RMD age of 70.5 which allows you to withdrawal the "year you turn 70.5".

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Re: Rule of 55 is it official?

Post by TLC » Tue Jan 23, 2018 10:10 am

fishandgolf wrote:
Tue Jan 23, 2018 9:40 am
The Rule 55 and 72(t) are both great options that allow you to withdrawal from your 401(k) or tIRA without having to pay the 10% penalty. The 72(t) is best used prior to age 55; Rule 55 is best once you turn 55.....and you must be 55....not the year you turn 55.....some adviser confuse this with the RMD age of 70.5 which allows you to withdrawal the "year you turn 70.5".
From https://www.irs.gov/publications/p17:

"Tax on Early Distributions
Additional exceptions for qualified retirement plans.
The tax doesn’t apply to distributions that are:
From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees);"

thx1138
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Re: Rule of 55 is it official?

Post by thx1138 » Tue Jan 23, 2018 10:13 am

In your situation also research and understand the "Roth Conversion Ladder". It is an effective way to also withdraw without penalty from retirement accounts and works at any age - even before 55. Basically you convert a 401k to a Traditional IRA and then do year by year conversions from Traditional IRA to Roth IRA. Those converted amounts into the Roth IRA can then be taken out without penalty after five years.

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Re: Rule of 55 is it official?

Post by Nate79 » Tue Jan 23, 2018 11:29 am

She is 45, 10 years away from this. So I would caution that while it is somewhat useful to plan ahead, as the recent tax law changes show ANYTHING can change from now and then. Be careful making some exact plan utilizing tax law that could quite easily change between now and 10 years from now. Keep some flexibility in such a case.

fourniks
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Re: Rule of 55 is it official?

Post by fourniks » Tue Jan 23, 2018 12:12 pm

TLC wrote:
Tue Jan 23, 2018 10:10 am
fishandgolf wrote:
Tue Jan 23, 2018 9:40 am
The Rule 55 and 72(t) are both great options that allow you to withdrawal from your 401(k) or tIRA without having to pay the 10% penalty. The 72(t) is best used prior to age 55; Rule 55 is best once you turn 55.....and you must be 55....not the year you turn 55.....some adviser confuse this with the RMD age of 70.5 which allows you to withdrawal the "year you turn 70.5".
From https://www.irs.gov/publications/p17:

"Tax on Early Distributions
Additional exceptions for qualified retirement plans.
The tax doesn’t apply to distributions that are:
From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees);"
TLC is correct in this. It's the calendar year that you reach 55, not actually the day you reach 55. This from Mike Piper:
In reality, however, the rule is slightly more lenient than that. IRS Notice 87-13* states that “a distribution to an employee from a qualified plan will be treated as within section 72(t)(2)(A)(v) if (i) it is made after the employee has separated from service for the employer maintaining the plan and (ii) such separation from service occurred during or after the calendar year in which the employee attained age 55.
Also, one should know that even though your plan may allow for distributions in the age at which they turn 55, the distribution options may not be ideal (yearly or all at once).

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Re: Rule of 55 is it official?

Post by Earl Lemongrab » Tue Jan 23, 2018 1:52 pm

As noted, the age 55 rule doesn't have anything to do with rollovers to an IRA. Also, once you do that, the 55 rule goes away. Any withdrawals from an IRA has the potential for penalty before age 59-1/2.
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Re: Rule of 55 is it official?

Post by House Blend » Tue Jan 23, 2018 2:31 pm

livesoft wrote:
Tue Jan 23, 2018 6:33 am
technovelist wrote:
Tue Jan 23, 2018 6:28 am
Are you thinking of the "in-service withdrawal" rules? I don't think any company can prevent you from rolling over your 401k balance when you leave their employment.
That is true, but a rollover is not an age-55-rule no penalty withdrawal. I don't know of any age limit to a rollover when you leave your employer.
Perhaps for 401(k) plans, but my 401(a) plan has such a restriction.

Retirement contributions from my employer go into a 401(a) plan, and the plan rules are such that I cannot touch that money (no withdrawals, no hardship, no loans, no rollovers, no nothing) until (a) I leave the job AND (b) reach age 55.

(My contributions go into a separate account with much more flexibility.)

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Re: Rule of 55 is it official?

Post by FactualFran » Tue Jan 23, 2018 3:51 pm

fishandgolf wrote:
Tue Jan 23, 2018 9:40 am
The Rule 55 and 72(t) are both great options that allow you to withdrawal from your 401(k) or tIRA without having to pay the 10% penalty. The 72(t) is best used prior to age 55; Rule 55 is best once you turn 55.....and you must be 55....not the year you turn 55.....some adviser confuse this with the RMD age of 70.5 which allows you to withdrawal the "year you turn 70.5".
The "Rule of 55" is part of section 72(t) of the income tax law. That section is about the 10-percent additional tax on early distributions from qualified retirement plans. "Rule of 55" is one of the exception to the 10-percent additional tax. It is an exception that does not apply to IRAs. The exception is for distributions "made to an employee after separation from service after attainment of age 55"

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Re: Rule of 55 is it official?

Post by White Coat Investor » Tue Jan 23, 2018 3:56 pm

anonsdca wrote:
Tue Jan 23, 2018 4:13 am
My understanding also. Retire at 55 and have a company 401K and keep that 401k with CO, you can withdraw Tax free--if you retire after 55. I am counting on this for me. I have:

1) Tax account--anytime -55
2) 401k - 55
3) IRA - 59.5
4) SSN - 62

So my retirement is based on this. Retiring abroad.
That makes me cry that you would base important decisions on your life on IRS rules that you don't seem to fully understand. There are so many exceptions to the age 59 1/2 rule (particularly SEPP) that it should not be sued to determine a retirement date in any way, shape, or form. Retire when you're ready to retire and don't sweat these "rules." They're easy to work around.
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Re: Rule of 55 is it official?

Post by Spirit Rider » Tue Jan 23, 2018 5:00 pm

Livesoft: The the age 55 rule is an exception to the t72 10% early withdrawal penalty. A 401k plan has no say in whether a withdrawal after you separate from service on or after the year you turn 55 is an exception to this penalty.

What you are probably thinking about is that a 401k plan is not required to offer you the ability to make multiple spontaneous withdrawals. Many plans only allow a periodic withdrawal schedule or a limp sum, or some just a lump sum.

For example, If the OP's wife's plan only allows a lump sum distribution. She could take the full lump sum distribution, set aside four years of expenses and roll the balance to an IRA, understanding that the age 55 exception does not apply to the rolled over funds.

Another option in this case is to wait until later in the year they turn 55 to retire and do the lump sum distribution need to reach age 59 1/2 in the following year. This might allow a lower marginal tax rate hit. Finally, as suggested, rollover the full amount to an IRA and use a 72t SEPP. Most financial professionals advise that as a last resort and the distributions are limited in amount. So you would have to do some combination.

The best option is to have a 401k plan in the year you turn 55 that allows unrestricted distributions. At least the OP's wife has 10 years to plan this out.

FootballFan5548
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Re: Rule of 55 is it official?

Post by FootballFan5548 » Tue Jan 23, 2018 5:05 pm

In my 401k, I currently have the majority of my money traditional, but I do have a small portion of the total amount (like 10%) that are Roth 401k. If I were to leave my job, or retire, would I be able to roll the 10% Roth portion into a Roth IRA, and the traditional (90%) portion into a traditional IRA?

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Re: Rule of 55 is it official?

Post by livesoft » Tue Jan 23, 2018 5:10 pm

@Spirit Rider, Thanks!
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voidstar
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Re: Rule of 55 is it official?

Post by voidstar » Tue Jan 23, 2018 5:46 pm

Thanks everyone for the responses, it is helpful and very appreciated.

I called my own 401k provider and asked about it. While I can (and have) setup Self-Managed accounts (some plans don't even allow that), we can not withdraw before 59.5 per my particular plan. I also browsed through their site. I'm not sure if it is technically legally binding information, but in their section about "Withdrawing Money From Your Account", it makes no reference to age 55. But I'll probe around some more to see if this is really accurate (and maybe even call them back in a couple months, see if I get the same answer).

I'll read up more on the 72(t) option. Tentatively I think the "rule of 55" is still a bit more flexible, if it were available. But it does indeed seem ambiguous on when this option is really available. Why wouldn't plans, or companies with such plans, be more explicit that this option is available? (I can think of a few reasons -- plan sponsors don't want to deal with managing withdrawls, or the legal responsibility of verifying people quit when they are suppose to quit, etc; or maybe companies just don't want to try to encourage early retirement?).

I'll ask my wife to call her provider when she gets time and see if they offer it for her plan.


Thanks again, good notes!

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Re: Rule of 55 is it official?

Post by MarkNYC » Tue Jan 23, 2018 5:56 pm

Both the separation from service and distribution must be after the employee attains age 55. The employee cannot separate at age 54 and then a year later after reaching age 55 make the distribution. That would not qualify.

Also, changing from an employee to independent contractor for the same company would not qualify as separation from service, especially if the same services were performed.

If the distribution qualifies, the former employer should issue a 1099-R with code 2 in box 7, indicating an early distribution with a known exception to the penalty. If the 1099-R shows code 1, then the taxpayer would need to complete Part 1 of Form 5329 to indicate the specific exception to the penalty.

Incidentally, the Form 5329 instructions state the 01 exception as "... distributions you receive after separation from service when the separation occurs in or after the year you reach age 55". This is an example of IRS form instructions that are carelessly written and therefore wrong, since the separation must occur after attaining age 55, not in the year you reach age 55.

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Re: Rule of 55 is it official?

Post by bhsince87 » Tue Jan 23, 2018 6:08 pm

My plan was always to retire in January of the year I turn 55 (2 years from now) so I could access my 401k funds without penalty.

But our taxable account has grown so much that accessing the 401k before 59.5 is not really a concern anymore.

I'm even thinking about retiring sooner, since 55 was set as a goal because of the 401k rules.
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Re: Rule of 55 is it official?

Post by fishandgolf » Tue Jan 23, 2018 6:30 pm

FactualFran wrote:
Tue Jan 23, 2018 3:51 pm
fishandgolf wrote:
Tue Jan 23, 2018 9:40 am
The Rule 55 and 72(t) are both great options that allow you to withdrawal from your 401(k) or tIRA without having to pay the 10% penalty. The 72(t) is best used prior to age 55; Rule 55 is best once you turn 55.....and you must be 55....not the year you turn 55.....some adviser confuse this with the RMD age of 70.5 which allows you to withdrawal the "year you turn 70.5".
The "Rule of 55" is part of section 72(t) of the income tax law. That section is about the 10-percent additional tax on early distributions from qualified retirement plans. "Rule of 55" is one of the exception to the 10-percent additional tax. It is an exception that does not apply to IRAs. The exception is for distributions "made to an employee after separation from service after attainment of age 55"
Thanks for clarification.....the Rule of 55 applies to 401(k) and not tIRA.

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Re: Rule of 55 is it official?

Post by Spirit Rider » Tue Jan 23, 2018 7:22 pm

voidstar: You will not find the mention of the age 55 rule in most 401k plan documents. The is not a 401k plan rule. The age 59 1/2 they were referring to was probably for in-service withdrawal/rollover. We are referring to withdrawals after separation. Separation is the triggering event.

Someone 25 could take a full withdrawal from their 401k after separation and buy a Porsche. The 401k plan has no say in this matter other than properly entering code 1 "Early distribution, no known exception". This would trigger a 10% early withdrawal penalty on the taxable income.

The age 55 rule is solely an exception to the 72t 10% early withdrawal penalty when you take a distribution after separation on or after the year you turn 55. The employer's only responsibility is to enter code 2 "Early distribution, exception applies" in Box 7 of the 1099-R.

In the Instructions for 1099-R and 5498, the explanation for Code 2 says; "Use Code 2 only if the participant has not reached age 59 1/2 and you know the distribution is the following.
  • A distribution from a qualified retirement plan after separation from service in or after the year the participant has reached age 55"
As I mentioned earlier. While the age 55 exception is guaranteed. A plan has full discretion on what types of distributions it allows after separation including lump sum only.

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Re: Rule of 55 is it official?

Post by Spirit Rider » Tue Jan 23, 2018 7:56 pm

FactualFran wrote:
Tue Jan 23, 2018 3:51 pm
fishandgolf wrote:
Tue Jan 23, 2018 9:40 am
The Rule 55 and 72(t) are both great options that allow you to withdrawal from your 401(k) or tIRA without having to pay the 10% penalty. The 72(t) is best used prior to age 55; Rule 55 is best once you turn 55.....and you must be 55....not the year you turn 55.....some adviser confuse this with the RMD age of 70.5 which allows you to withdrawal the "year you turn 70.5".
The "Rule of 55" is part of section 72(t) of the income tax law. That section is about the 10-percent additional tax on early distributions from qualified retirement plans. "Rule of 55" is one of the exception to the 10-percent additional tax. It is an exception that does not apply to IRAs. The exception is for distributions "made to an employee after separation from service after attainment of age 55"
MarkNYC wrote:
Tue Jan 23, 2018 5:56 pm
Incidentally, the Form 5329 instructions state the 01 exception as "... distributions you receive after separation from service when the separation occurs in or after the year you reach age 55". This is an example of IRS form instructions that are carelessly written and therefore wrong, since the separation must occur after attaining age 55, not in the year you reach age 55.
Can we not continue to confuse the OP with incorrect information. Especially from MarkNYC: who is usually the one correcting me when I veer away from my comfort zone of tax advantaged accounts.

You are all 100% incorrect. The age 55 rule is most definitely "on or after the year you turn 55", "not after you turn 55.

Yes, 26 code 72(t)(2)(A)(v) says; "made to an employee after separation from service after attainment of age 55,"

However, as pointed out by MarkNYC, the Form 5329 Instructions for Line 2 exception 01. Not to mention the age 55 exception in the explanation for Code 2 box 7 of Form 1099-R I previously posted.

The multitudes of other references and website links over that last thirty years, e.g. Topic Number: 558 - Additional Tax on Early Distributions from Retirement Plans Other Than IRAs
The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:
  1. Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55
Finally IRS Notice 87 - 13 that started it all:
“a distribution to an employee from a qualified plan will be treated as within section 72(t)(2)(A)(v) if (i) it is made after the employee has separated from service for the employer maintaining the plan and (ii) such separation from service occurred during or after the calendar year in which the employee attained age 55.”

voidstar
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Re: Rule of 55 is it official?

Post by voidstar » Tue Jan 23, 2018 7:57 pm

That does make more sense. For reference: https://www.irs.gov/pub/irs-pdf/f1099r.pdf

And I see the code 2 you mentioned.

My wife happens to have her birthday in January. So, assuming laws are basically the same as now and some A.I. hasn't taken over the world, just to play a scenario in ~10 years: my wife could give a 2 week notice mid-January in the year she turns 55 (and by then, would be 55). So say Feb 1st, she has terminated employment. And suppose she has $400k in her 401k.

The question really is then: what kind of withdrawl does her employer allow? Lump sum, or just as-needed. i.e. does she have to take the full $400k at once? or could she take $100k a year for the next 4 years? Or could she take $5000 a month -- i.e. whatever she felt appropriate (and it continues to gain with the remaining balance until fully withdrawn) Eitherway, the plan provider does the Form 1099-R as you mentioned.

I assume also the distribution of the withdrawl is indicates somewhere (like from a bond or equity Core Fund). Haven't retired before -- is all this fairly automated through the web interfaces of the fund provider? Or is it more like a phone call, and say "hey don't forget that 2 in box 7" reminder, and send me $500 (or whatever) to such and such bank account? And at the end of the year, this form is mailed by the provider?

Thanks!

MarkNYC
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Re: Rule of 55 is it official?

Post by MarkNYC » Tue Jan 23, 2018 8:27 pm

Spirit Rider wrote:
Tue Jan 23, 2018 7:56 pm

You are all 100% incorrect. The age 55 rule is most definitely "on or after the year you turn 55", "not after you turn 55.

Yes, 26 code 72(t)(2)(A)(v) says; "made to an employee after separation from service after attainment of age 55,"

Finally IRS Notice 87 - 13 that started it all:
“a distribution to an employee from a qualified plan will be treated as within section 72(t)(2)(A)(v) if (i) it is made after the employee has separated from service for the employer maintaining the plan and (ii) such separation from service occurred during or after the calendar year in which the employee attained age 55.”
Spirit,

I agree that you are correct on the age 55 requirement, and I was mistaken. This appears to be a rare case where the language of the Code does not mean what it specifically says.

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willthrill81
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Re: Rule of 55 is it official?

Post by willthrill81 » Tue Jan 23, 2018 8:40 pm

House Blend wrote:
Tue Jan 23, 2018 2:31 pm
livesoft wrote:
Tue Jan 23, 2018 6:33 am
technovelist wrote:
Tue Jan 23, 2018 6:28 am
Are you thinking of the "in-service withdrawal" rules? I don't think any company can prevent you from rolling over your 401k balance when you leave their employment.
That is true, but a rollover is not an age-55-rule no penalty withdrawal. I don't know of any age limit to a rollover when you leave your employer.
Perhaps for 401(k) plans, but my 401(a) plan has such a restriction.

Retirement contributions from my employer go into a 401(a) plan, and the plan rules are such that I cannot touch that money (no withdrawals, no hardship, no loans, no rollovers, no nothing) until (a) I leave the job AND (b) reach age 55.

(My contributions go into a separate account with much more flexibility.)
One of my old 401(a) plans has the same restriction: no rollovers or withdrawals of any kind prior to leaving the job and reaching age 55. When I found out about this after I left that employer, I was...angry. :annoyed

I need to check to see if my current 401(a) plan has the same restriction. Either way, I also have access to a 457 that I should be maxing out within a couple of years, and I know for a fact that it has no restrictions on withdrawals (and no early withdrawal penalty) beyond that you must be separated from the employer or be experiencing certain financial hardships while still in service.
Last edited by willthrill81 on Wed Jan 24, 2018 2:12 am, edited 1 time in total.
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Spirit Rider
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Re: Rule of 55 is it official?

Post by Spirit Rider » Tue Jan 23, 2018 9:07 pm

MarkNYC wrote:
Tue Jan 23, 2018 8:27 pm
Spirit,

I agree that you are correct on the age 55 requirement, and I was mistaken. This appears to be a rare case where the language of the Code does not mean what it specifically says.
I'm not sure what the IRS's rationalization is for the difference in various treatments for "attained age".

In the case of the age 59 1/2 penalty free distribution and age 70 1/2 tax free QCD distribution it is the actual attained age.

In the case of the age 55 penalty free distribution and the age 70 1/2 RMD requirement it is the year of the attained age.

What is particularly ironic is that the age 55 and age 59 1/2 penalty exceptions are both in subsection 72(t)(2)(A), (i) & (v) respectively. Explain that...

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Epsilon Delta
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Re: Rule of 55 is it official?

Post by Epsilon Delta » Tue Jan 23, 2018 10:19 pm

MarkNYC wrote:
Tue Jan 23, 2018 8:27 pm
I agree that you are correct on the age 55 requirement, and I was mistaken. This appears to be a rare case where the language of the Code does not mean what it specifically says.
You mean like the section that said only one indirect rollover per year, but meant only one indirect rollover per account per year. Until it didn't, but now means something one indirect rollover per 12 months that still makes no sense.

But who's going to ask the court?

I don't think there is any risk in relying on the pubs and instructions for age 55 withdrawals, but it is possible the rules may change at some time in the future, almost certainly with grandfathering.

anonsdca
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Re: Rule of 55 is it official?

Post by anonsdca » Tue Jan 23, 2018 10:39 pm

White Coat Investor wrote:
Tue Jan 23, 2018 3:56 pm
anonsdca wrote:
Tue Jan 23, 2018 4:13 am
My understanding also. Retire at 55 and have a company 401K and keep that 401k with CO, you can withdraw Tax free--if you retire after 55. I am counting on this for me. I have:

1) Tax account--anytime -55
2) 401k - 55
3) IRA - 59.5
4) SSN - 62

So my retirement is based on this. Retiring abroad.
That makes me cry that you would base important decisions on your life on IRS rules that you don't seem to fully understand. There are so many exceptions to the age 59 1/2 rule (particularly SEPP) that it should not be sued to determine a retirement date in any way, shape, or form. Retire when you're ready to retire and don't sweat these "rules." They're easy to work around.
No need to cry WCI. I am not interested in any of the SEPP methods. However, what I didn't take into account --and is great info in this thread is "does my actual Plan" allow for WD. I need to check that out. If it doesn't it will alter my strategy somewhat, but not greatly.

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fortfun
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Re: Rule of 55 is it official?

Post by fortfun » Tue Jan 23, 2018 10:43 pm

anonsdca wrote:
Tue Jan 23, 2018 4:13 am
My understanding also. Retire at 55 and have a company 401K and keep that 401k with CO, you can withdraw Tax free--if you retire after 55. I am counting on this for me. I have:

1) Tax account--anytime -55
2) 401k - 55
3) IRA - 59.5
4) SSN - 62

So my retirement is based on this. Retiring abroad.
How about 403b? 55?

Alan S.
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Re: Rule of 55 is it official?

Post by Alan S. » Tue Jan 23, 2018 11:28 pm

Yes, a 403a or 403b is a qualified retirement plan for purposes of the age 55 penalty exception.

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White Coat Investor
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Re: Rule of 55 is it official?

Post by White Coat Investor » Wed Jan 24, 2018 9:45 am

anonsdca wrote:
Tue Jan 23, 2018 10:39 pm
White Coat Investor wrote:
Tue Jan 23, 2018 3:56 pm
anonsdca wrote:
Tue Jan 23, 2018 4:13 am
My understanding also. Retire at 55 and have a company 401K and keep that 401k with CO, you can withdraw Tax free--if you retire after 55. I am counting on this for me. I have:

1) Tax account--anytime -55
2) 401k - 55
3) IRA - 59.5
4) SSN - 62

So my retirement is based on this. Retiring abroad.
That makes me cry that you would base important decisions on your life on IRS rules that you don't seem to fully understand. There are so many exceptions to the age 59 1/2 rule (particularly SEPP) that it should not be sued to determine a retirement date in any way, shape, or form. Retire when you're ready to retire and don't sweat these "rules." They're easy to work around.
No need to cry WCI. I am not interested in any of the SEPP methods. However, what I didn't take into account --and is great info in this thread is "does my actual Plan" allow for WD. I need to check that out. If it doesn't it will alter my strategy somewhat, but not greatly.
Good. But there are many people who stay in a job they hate for a few more years because they don't know about SEPP.
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