401(k) rule of 55: plan-specific?

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Raspberry-503
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401(k) rule of 55: plan-specific?

Post by Raspberry-503 »

Having turned 55 and hoping to retire before 59 1/2 I am very interested in the "rule of 55" but I'm seeing conflicting info about it.

I originally thought that if you leave your job at 55 or later, the IRS allows you to take any amount out of your 401(k) penalty-free.

I the hear that your plan may not allow you to take any amount, in which case you may need to cash out the whole thing (and pay taxes on the corresponding income in one year)

When I asked my employer they told me the plan doesn't support the rule of 55 and I can ot withdraw any money.

Is it truly plan dependent?
starfury
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Re: 401(k) rule of 55: plan-specific?

Post by starfury »

Raspberry-503 wrote: Sun Mar 17, 2024 12:32 am Is it truly plan dependent?
Yes. The IRS allows it, but they don't require your employer to do so. Check your Summary Plan Description for your particular details.
HomeStretch
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Re: 401(k) rule of 55: plan-specific?

Post by HomeStretch »

Check your 401k Summary Plan Description to see if it allows ex-employees to take partial distributions. If not, you will only be able to take one penalty-free distribution in connection with a rollover of your full 401k plan balance to a Rollover IRA.
MrJedi
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Re: 401(k) rule of 55: plan-specific?

Post by MrJedi »

Once you separate they cannot stop you from taking out the money but they also don't have to allow partial distributions. If that's the case you can still use the rule of 55 to avoid the penalty but it may not be very helpful to take a lump sum distribution of your full balance since any pretax amount will be taxable and presumably you want to spread it out over many tax years.

I believe a slight workaround would be to take the full distribution and do an indirect rollover to an IRA for any amount you don't want taxable that year. That will only really help for 1 year though.
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Svensk Anga
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Re: 401(k) rule of 55: plan-specific?

Post by Svensk Anga »

MrJedi wrote: Sun Mar 17, 2024 6:47 am Once you separate they cannot stop you from taking out the money but they also don't have to allow partial distributions. If that's the case you can still use the rule of 55 to avoid the penalty but it may not be very helpful to take a lump sum distribution of your full balance since any pretax amount will be taxable and presumably you want to spread it out over many tax years.

I believe a slight workaround would be to take the full distribution and do an indirect rollover to an IRA for any amount you don't want taxable that year. That will only really help for 1 year though.
Aren't they required to withhold for income taxes on a distribution that is not a rollover to a custodian? That makes it impractical to use the rule of 55 for a large 401k if the employer won't support it.
DAVERUN
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Re: 401(k) rule of 55: plan-specific?

Post by DAVERUN »

Based on my age I am about 19 months away from when i'm eligible to leave employer and start taking payments from the 401k based on rule of 55. I would actually be about 54.5 starting the tax year in which I turn 55 and would likely retire at 54.5. I read the plan documents and the plan does allow withdrawals after separation from company but these are not unlimited withdrawals and the plan documents have general language that such withdrawals must be based on life expectancy unless one is at full retirement age which plan states to be well after 60 from what I recall. My interpretation of plan is that I could withdraw from the plan based on a life expectancy table. The plan is not specific on what life expectancy tables can be used so I would assume it would be the same type of life expectancy tables in Sepp plan. Does anyone have experience with using rule of 55 to withdrawal based on life expectancy tables between age of 55 and 59.5. I would just use life expectancy tables to withddraw from plan between 55 and 59.5 then roll balance to IRA at that point. I know when you are in a Sepp plan you can only change the life expectancy method once. in a rule of 55 situation where you are withdrawing from 401k based on life expectancy is there more flexibility to change life expectancy method more than once between 55 and 59.5. Plan documents are not specific on this-only talks of using life expectancy method. At begining of year when i'm 12 months away from being eligible for 55 withdrawals I will ask for a sample of form paper work where one would request the distribution and study the form in more detail-i assume these type of distribution forms have to be completed each year with amount to be withdrawn and method used. My plan would be to take one distribution a year-late in the calendar year such as lateNovember, early december as I know they will take 20% taxes and I anticipate being in a lower tax bracket then 20% and would file for tax refund ASAP in in new calendar year. First year of the retirement i would just live off of savings till I get that first distribution late in the year.
Alan S.
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Re: 401(k) rule of 55: plan-specific?

Post by Alan S. »

DAVERUN wrote: Tue May 14, 2024 8:47 pm Based on my age I am about 19 months away from when i'm eligible to leave employer and start taking payments from the 401k based on rule of 55. I would actually be about 54.5 starting the tax year in which I turn 55 and would likely retire at 54.5. I read the plan documents and the plan does allow withdrawals after separation from company but these are not unlimited withdrawals and the plan documents have general language that such withdrawals must be based on life expectancy unless one is at full retirement age which plan states to be well after 60 from what I recall. My interpretation of plan is that I could withdraw from the plan based on a life expectancy table. The plan is not specific on what life expectancy tables can be used so I would assume it would be the same type of life expectancy tables in Sepp plan. Does anyone have experience with using rule of 55 to withdrawal based on life expectancy tables between age of 55 and 59.5. I would just use life expectancy tables to withddraw from plan between 55 and 59.5 then roll balance to IRA at that point. I know when you are in a Sepp plan you can only change the life expectancy method once. in a rule of 55 situation where you are withdrawing from 401k based on life expectancy is there more flexibility to change life expectancy method more than once between 55 and 59.5. Plan documents are not specific on this-only talks of using life expectancy method. At begining of year when i'm 12 months away from being eligible for 55 withdrawals I will ask for a sample of form paper work where one would request the distribution and study the form in more detail-i assume these type of distribution forms have to be completed each year with amount to be withdrawn and method used. My plan would be to take one distribution a year-late in the calendar year such as lateNovember, early december as I know they will take 20% taxes and I anticipate being in a lower tax bracket then 20% and would file for tax refund ASAP in in new calendar year. First year of the retirement i would just live off of savings till I get that first distribution late in the year.
This plan provision is atypical and is only marginally preferable to those of a plan that only allows total distributions.

If the provisions you describe limit you to those of an RMD table, and you selected the single LE table which provides the highest distributions, you still will be limited to only about 3.1% of the prior year end account value to start and it would only increase by a small amount in subsequent years due to increased age and if the account value increases. So unless you have a 7 figure balance, this will probably not be enough to meet your needs.

But you may wish to look into the specifics of this limited partial distribution plan.
PeddlerDavid
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Re: 401(k) rule of 55: plan-specific?

Post by PeddlerDavid »

I spent about 6 months trying to answer this very question. The plan for my spouse to retire at 55 hinged on access to funds in an employer-sponsored retirement plan. In preparation for retirement the sources I read online all included some language like "if offered by your employer" so I asked my spouse's employer and was told their plan does not offer penalty free withdrawals under the rule of 55 (I should note here that this employer is not particularly sophisticated in financial matters). It then took weeks to obtain a copy of the actual plan document. The document detailed that any withdrawals prior to 59.5 were subject to penalty. In fact, the number "55" did not appear anywhere in that document. When I persisted and spoke with the plan administrator I was assured that, contrary to what I had been told by the employer, penalty-free withdrawals were indeed available. According to the plan administrator, the only role that the employer has is whether or not to allow partial withdrawals. As others here have clarified if the plan does not allow partial withdrawals, a single penalty-fee withdrawal under the rule of 55 is technically possible, but would almost certainly be subject to such high tax rates as to make it undesirable. When asked why the rule of 55 is not mentioned in the plan document the administrator said that the rule of 55 is an IRS rule, or rather one of many exceptions to early the early withdrawal penalty. He further explained that allowing/enabling withdrawals is the role of the plan and that imposing or not imposing a penalty is the role of the IRS.

From the IRS:

https://www.irs.gov/retirement-plans/pl ... tributions

Separation from service the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit or defined contribution plan) **

The topic is not as clear as it should be. I hope this helps.
PeddlerDavid
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Re: 401(k) rule of 55: plan-specific?

Post by PeddlerDavid »

"pulling out all of your money in one year" would typically be done as a rollover to an IRA and not taxed in one year, but rather when withdrawan from the IRA.
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Raspberry-503
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Re: 401(k) rule of 55: plan-specific?

Post by Raspberry-503 »

PeddlerDavid, it does help. I talked to my company's plan administrator and they are looking into allowing partial distributions as part of a restructuring of the plan (moving from Newport to Empower). We'll see what happens.
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Re: 401(k) rule of 55: plan-specific?

Post by Alan S. »

Raspberry-503 wrote: Wed May 15, 2024 10:01 am PeddlerDavid, it does help. I talked to my company's plan administrator and they are looking into allowing partial distributions as part of a restructuring of the plan (moving from Newport to Empower). We'll see what happens.
The plan apparently offers partial distributions now, but heavily restricted to an IRS RMD table. However, if the plan is changed to allow discretionary distributions of amounts of your choosing whenever you wish, this would be a major improvement. Without it, unless your situation happens to mesh with the current restrictions, you might compare the current plan distribution amount with a 72t plan from your IRA to see if that distribution would be large enough. If it is, a direct rollover to an IRA to adopt a 72t plan would be preferable, even if the 72t plan is also restrictive and a retroactive penalty of 10% is assessed if you make an error.

For someone in your situation, by far the best option to avoid the penalty prior to 59.5 is a 401k that offers totally flexible partial distributions. Or even if the number of distributions per year is limited, that is something that you should be able to manage.
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Hacksawdave
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Re: 401(k) rule of 55: plan-specific?

Post by Hacksawdave »

I went through this exercise several years ago when forming my transition plan. After you check with your 401k plan SPD documents and company specific rules, if you have third-party administrator, you need to check with them as well. I had to verify that both company XYZ’s plan and 401k Inc. had the same rules to perform what I wanted to do if needed.

As it turns out I did not need to exercise the rule of 55 but did find out all the idiosyncrasies of my provider’s rules that clashed with what I wanted to do. Some have since been corrected by the provider.

One trick I was going to explore was if they did not allow the rule of 55 would be to do a partial rollover into a TIRA as I had none, and then see about doing a 72t on the partial rollover TIRA only. I never did need to go into a deep dive to figure that one out.
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Raspberry-503
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Re: 401(k) rule of 55: plan-specific?

Post by Raspberry-503 »

I never thought about doing a 72(t) on a partial balance.
The balance of this 401(k) is about $400k so I could set up a 72(t) to disburse it over 10 years, that would be small enough to not screw things up too badly, even with my plan to do Roth conversions, but I hat committing to $40k of forced income for 10 years.
I may choose to fund time before 59 1/2 from taxable.

Nice that I have options even without the rule of 55
Fess McGee
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Re: 401(k) rule of 55: plan-specific?

Post by Fess McGee »

Did not read the entire thread but this question has been asked many times and the best and most common sense response I’ve seen is that the question isn’t whether your plan allows the Rule of 55 but instead whether your plan allows partial distributions (some must exist that don’t) and before 59.5.

If so, your plan has nothing to do with the tax treatment. That’s up to the IRS. I do think it’s easier if your plan does recognize it and checks the appropriate box on the 1099 but if they don’t, you just need to file a form with the IRS.
MnD
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Re: 401(k) rule of 55: plan-specific?

Post by MnD »

Yes completely plan specific.

My wife's employer had two options when she retired at age 56.
100% rollover
Partial rollover with remainder being one partial distribution done at the same time.

So technically the one partial distribution met the rule of 55 requirement, but that's not what we had hoped for which was periodic partial distributions.

Fortunately my plan supported periodic partial distributions so we did a partial distribution equal to a year of what we wanted to withdraw and then just took more out my account until she turned 59.5.
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chassis
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Re: 401(k) rule of 55: plan-specific?

Post by chassis »

Raspberry-503 wrote: Sun Mar 17, 2024 12:32 am Having turned 55 and hoping to retire before 59 1/2 I am very interested in the "rule of 55" but I'm seeing conflicting info about it.

I originally thought that if you leave your job at 55 or later, the IRS allows you to take any amount out of your 401(k) penalty-free.

I the hear that your plan may not allow you to take any amount, in which case you may need to cash out the whole thing (and pay taxes on the corresponding income in one year)

When I asked my employer they told me the plan doesn't support the rule of 55 and I can ot withdraw any money.

Is it truly plan dependent?
As stated above the plan is not required to offer rule of 55. You can however do a 72(t) aka SEPP withdrawal plan.
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