Rollover Funds into 401K from prior employer - Rule of 55 Eligible?

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Doc7
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Rollover Funds into 401K from prior employer - Rule of 55 Eligible?

Post by Doc7 »

I have a fairly confident understanding that my wife cannot roll funds into her governmental 457 and have the same “age limit unrestricted” access to that money upon retirement like she does with direct contributions and earnings.

Conversely, I am wondering if, as my current employer has Rule of 55 in the summary plan description, if I roll over my prior employers 401k funds into this plan, will I have access to those funds if I retire at or after 55?

(note - currently 37 and planning to work for decades longer)
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David Jay
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Re: Rollover Funds into 401K from prior employer - Rule of 55 Eligible?

Post by David Jay »

The answer is "Yes".

Age 55 is allowed from any 401k (including your previous one) by the IRS. What limits Rule of 55 access is the employer plan documents. This is a good work-around if your new employer's 401k has good fund selections and reasonable expenses.
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Doc7
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Re: Rollover Funds into 401K from prior employer - Rule of 55 Eligible?

Post by Doc7 »

David Jay wrote: Thu Nov 24, 2022 8:43 am The answer is "Yes".

Age 55 is allowed from any 401k (including your previous one) by the IRS. What limits Rule of 55 access is the employer plan documents. This is a good work-around if your new employer's 401k has good fund selections and reasonable expenses.

They do have good choices. My old employer does also. I have not rolled over (been here 8 years) because as a Boglehead once advised me, someday one of these plans could get hit with the bad stick and get high fees / poor funds. As right now are both nearly zero fee with excellent Vanguard fund options, I just stand put and rebalance accordingly.
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retiredjg
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Re: Rollover Funds into 401K from prior employer - Rule of 55 Eligible?

Post by retiredjg »

Doc7 wrote: Thu Nov 24, 2022 8:34 am I have a fairly confident understanding that my wife cannot roll funds into her governmental 457 and have the same “age limit unrestricted” access to that money upon retirement like she does with direct contributions and earnings.
She might be able to roll them in, but if the funds are from 401k or 403b or IRA, they do not take on the "age limit unrestricted" access upon separation from the employer.

Conversely, I am wondering if, as my current employer has Rule of 55 in the summary plan description, if I roll over my prior employers 401k funds into this plan, will I have access to those funds if I retire at or after 55?
My understanding is a little different from David Jay. I think one can only use the rule of 55 with the last plan (the plan from your last employer at retirement). I have read here that rollovers into that last plan are also available for penalty free withdrawals if one retires in or after the year in which you reach 55. I don't have a reference for that though.
mariezzz
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Re: Rollover Funds into 401K from prior employer - Rule of 55 Eligible?

Post by mariezzz »

It's critical people understand the first sentence below .... If you left a job before the year in which you turned 55, you do NOT qualify to withdraw from that jobs 401k/403b penalty-free (unless you've transferred those funds into a 403b/401k for a job which you left in or after you turned 55).
Note also that employers do NOT have to allow early withdrawals.
(The 2nd post in this thread is either written unclearly or mistaken).

https://smartasset.com/retirement/401k-55-rule
Under the terms of this rule, you can withdraw funds from your current job’s 401(k) or 403(b) plan with no 10% tax penalty if you leave that job in or after the year you turn 55. (Qualified public safety workers can start even earlier, at 50.) It doesn’t matter whether you were laid off, fired, or just quit.

The distributions are not completely tax-free: Like all withdrawals from a traditional 401(k) or 403(b), you do have to pay income tax. Only the 10% tax penalty is bypassed in this scenario.

In addition, note that employers are not obliged to allow early withdrawals; and, if they do allow them, they may require that the entire amount be taken out in one lump-sum withdrawal. This could expose you to a higher income tax.

This rule applies to current – not former – 401(k) or 403(b) plans. The government does not permit penalty-free withdrawals before 59.5 from plans you had with a previous employer. If you want access to that money under the rule of 55, you would have to transfer those funds into your current 401(k) or 403(b) plan.
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retiredjg
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Re: Rollover Funds into 401K from prior employer - Rule of 55 Eligible?

Post by retiredjg »

smartasset.com/retirement/401k-55-rule/ wrote: In addition, note that employers are not obliged to allow early withdrawals.....
I question if this part is exactly correct. Once you leave an employer, I'm not sure they have the authority to "not allow" a withdrawal. However, they can make withdrawals unattractive and inconvenient by requiring only a lump sum withdrawal as opposed to periodic withdrawals that would be what almost everybody would want.
HomeStretch
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Re: Rollover Funds into 401K from prior employer - Rule of 55 Eligible?

Post by HomeStretch »

Doc7 wrote: Thu Nov 24, 2022 8:34 am Conversely, I am wondering if, as my current employer has Rule of 55 in the summary plan description, if I roll over my prior employers 401k funds into this plan, will I have access to those funds if I retire at or after 55?
Yes, you will.

You do not have “Rule of 55” access to a prior employer plan if your separation date from the prior employer was prior to January 1 of the year in which you reach age 55. So rolling over such prior employer plan(s) into your current plan makes sense.

For the “Rule of 55” to be most advantageous to you, your current employer plan must allow partial distributions by retired/former employees. So check whether this is allowed by your plan. If not, you will only be able to utilize the “Rule of 55” in connection with a lump-sum distribution.

If at age 55+ you become employed again and participate in the new employer’s 401k plan, you are also allowed to utilize the “Rule of 55” for the new plan if you separate from employment. So it is possible to have “Rule of 55” access to more than one 401k plan.
rkhusky
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Re: Rollover Funds into 401K from prior employer - Rule of 55 Eligible?

Post by rkhusky »

This quote from a different thread clearly describes how the employer can affect the rule of 55:
MarkNYC wrote: Thu Dec 23, 2021 11:33 am The "rule of 55" is a federal law that, under certain conditions, exempts the retirement plan distribution from the 10% penalty for early distributions. The employer plan has no authority to disallow this penalty exemption. What the employer plan can do is, upon separation from service, require the former employee to withdraw the account balance in full rather than in annual installments, and for most people this would make the "rule of 55" impractical.
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Doc7
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Re: Rollover Funds into 401K from prior employer - Rule of 55 Eligible?

Post by Doc7 »

HomeStretch wrote: Fri Nov 25, 2022 8:14 am
Doc7 wrote: Thu Nov 24, 2022 8:34 am Conversely, I am wondering if, as my current employer has Rule of 55 in the summary plan description, if I roll over my prior employers 401k funds into this plan, will I have access to those funds if I retire at or after 55?
Yes, you will.

You do not have “Rule of 55” access to a prior employer plan if your separation date from the prior employer was prior to January 1 of the year in which you reach age 55. So rolling over such prior employer plan(s) into your current plan makes sense.

For the “Rule of 55” to be most advantageous to you, your current employer plan must allow partial distributions by retired/former employees. So check whether this is allowed by your plan. If not, you will only be able to utilize the “Rule of 55” in connection with a lump-sum distribution.

If at age 55+ you become employed again and participate in the new employer’s 401k plan, you are also allowed to utilize the “Rule of 55” for the new plan if you separate from employment. So it is possible to have “Rule of 55” access to more than one 401k plan.

Here is what my SPD states, in different sections:
10% TAX PENALTY ON EARLY DISTRIBUTION
You may be required to pay a 10% IRS tax penalty, in addition to ordinary income tax, on the taxable
portion of distributions made to you before age 59½, including distributions due to termination of
employment. Congress imposed this tax penalty to discourage the use of long-term savings held in
employer-sponsored plans for anything other than retirement. The tax penalty will not be imposed under
any of the following circumstances:
• You are at least 59½ years old.
• You leave MEGACORP on or after attaining age 55.


But this part appears to be a problem!! And DOES NOT appear to be related whatsoever to 55, 59 1/2, etc.
General Procedures
When you retire or your employment is terminated due to becoming disabled, as determined under
MEGACORP’s Long Term Disability Plan, you can elect to have the entire value of your account
distributed to you according to the “Forms of Payment” section. If your vested account balance exceeds
$1,000, you may elect to defer payment until April 1 following the later of the calendar year in which you
reach age 70½, or, in certain circumstances, retire.
You may request a Distribution Kit from Conduent at any time after you retire or your employment
terminates due to disability. Your Distribution Kit will include information about direct rollovers.
If your account balance is $1,000 or less and you do not elect distribution at the time of your employment
termination due to retirement or disability, payment will be made in a lump sum cash payment and taxes
will be withheld.
If you retire from MEGACORP, you can choose to have your account distributed to you in annual,
semi-annual, or quarterly installments. The installment method will provide periodic income that lasts as
long as you have a balance in your account. The amount you receive each year is paid according to IRS
life expectancy tables. The amount you receive each year must satisfy IRS rules and regulations.
Installments will be paid on the first Tuesday of January, April, July, and October. The installment
amounts will be taken on a pro-rata basis from each of your investment funds. While you are receiving
installments, you have all the rights of a Participant except you cannot take any loans from the Savings
Plan and you cannot make any contributions to the Savings Plan. You can also elect at any time to
receive the entire balance of your account.



It seems to me like regardless of age, my only real options will be an installment payment I have no control over, or rollover to IRA. May need to think about SEPP 72t planning from IRAs if that's going to be something I need to do (18-20 yrs from now).
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retiredjg
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Re: Rollover Funds into 401K from prior employer - Rule of 55 Eligible?

Post by retiredjg »

I don't recall seeing something like this before. The way I'm reading it, you have a choice of lump sum or the described inflexible installment method. Or a rollover to IRA. Seems like you need to ask the HR folks if that (or some other) is the right interpretation.

However, there may be a lot of changes in the next 18 to 20 years. I would not be concerned about this now, but it seems smart to keep an eye on it for sure. If it turns out that way and if you retire early, you will need to make plans to accommodate that.

Remember that age 55 and age 59.5 have to do with waiving penalties required by the IRS. How distributions are allowed is determined by the plan. The plan has no authority over the penalty at all. And the IRS has no authority over the plan.
HomeStretch
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Re: Rollover Funds into 401K from prior employer - Rule of 55 Eligible?

Post by HomeStretch »

The first SPD quote you posted is the IRS-required Rule of 55 language.

The second SPD quote you posted covers distributions if you retire (the Plan allows RMDs starting at now age 72) or if you separate from employment due to disability. Look for the section that discusses distribution options for participants whose employment terminated for reasons other than retirement or disability.

Be sure you are reviewing the latest Plan document The SPD you are quoting from shows RMDs beginning at age 70-1/2. The beginning RMD age increased to age 72 a couple years ago. Your company should update the SPD periodically for material changes. So I am wondering if you have the latest document.

Edit - I agree with retiredjg that this is good to keep an eye on now but you at age 37 (and 401k rules) have 18 years of possible changes. As your current employer plan has good low-cost fund choices, for simplicity and good housekeeping I think it’s a good idea to rollover your old 401k into your current plan.
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