401k withdrawals at 55

[laurence]

So we are planning on DW retiring at 55 and me stopping earlier for kid raising/housekeeping/increased togetherness time. We'll have two large accounts, her 401k and mine, plus some small IRAs (SEP, Roth, traditional) and a rental property throwing off income. I know tax laws allow her to withdraw from her 401k at 55 without the 10% penalty, but I'm struggling to find language on any further restrictions. We'd like to draw our entire income from her 401k from 55 to age 62 and leave everything else alone to continue growing. For that individual account that means drawing far more than what people talk about being a safe withdrawal rate here, but not when compared to our total portfolio. My question is will we have unfettered access to that account? Can we pull 10% of the balance every year without penalty/restriction? Since it only has to survive the seven years we can pull closer to 20% with minimal returns and still have it have a positive balance at 62. I can't access my 401k until 59.5, obviously, since I stopped work before 55 (hopefully way before). Anyone else drawn down one bucket of money like that?

 

[SteveNU]

Have to check the Summary Plan Description for the 401k plan and see if it tells you what if any restrictions you might have. The only one I had was that any withdrawal had to be at least $500.

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[Sunset]

You need to read wife's 401K rules carefully as companies are allowed to restrict withdrawls even though IRS says you can take out prior to 59.5 without penalties as that does not mean you can take it out.

Company may even rule that you have to withdraw all of it in 1 shot. Obviously intent was for rollover to IRA, or for small 401Ks, or convert to annuity.
Hopefully your wife's is not like that.

 

[Bamaman]

When I retired prior to age 59.5, my company required all of the 401K funds to leave their plan--rollover IRA to the same investment firm.

They were paying the fund expenses on most employees' 401K mutual funds, but they limited the funds availability. I had long since agreed to pay expenses to get access to all of Fidelity's best funds, but I still had to do a rollover.

 

[MRG]

Your SPD must specify that you can take early withdrawals, some don't. Additionally the custodian must allow a way to provide a method for you to access the funds, some don't.

You could also do a 72t as your withdrawal strategy it sounds like a good fit.

 

[ziggy29]

You could also do a 72t as your withdrawal strategy it sounds like a good fit.

The problem is, it sounds like the OP wants to withdraw more than 72t would allow -- until age 62. If maximizing the possible legal distribution under 72t would be enough income until age 62, that could work. Otherwise, OP will need to check on the distribution rules of the plan. Just because the tax code may allow for it, there's no assurance that the plan's custodian will.

 

[LuckyDog]

At age 53, I took an early retirement package with a bridge to retirement at age 55 and stopped w*rking. At age 55, I officially retired from the major corp. At that time, I started making withdrawals from my 401K (enough to take us to the top of the 15% tax bracket) without penalty. The idea was not to spend the money, but to pay the taxes in a lower bracket than we would be in later.

 

[Big_Hitter]

At age 53, I took an early retirement package with a bridge to retirement at age 55 and stopped w*rking.

wow, what's that like? I'd be ecstatic.

 

[GravitySucks]

As others have said, check the SPD carefully and maybe speak to the plan admin, but I am pulling 20% of my 401k as it only needs to last 5 years. I rolled the rest of the funds into my IRA.
Doing this keeps me on a short leash until 59.5. A built in spending circuit breaker.

 

[ziggy29]

As others have said, check the SPD carefully and maybe speak to the plan admin, but I am pulling 20% of my 401k as it only needs to last 5 years. I rolled the rest of the funds into my IRA.
Doing this keeps me on a short leash until 59.5. A built in spending circuit breaker.

That's probably similar to what I'd do -- especially if the plan has restrictive distribution policies.

 

[LuckyDog]

wow, what's that like? I'd be ecstatic.

It was a dream come true. DW and I did like many on this forum and saved our money. Every day is like Christmas...

 

[gauss]

Do you have online or telephone access to your 401k?

If so, go ahead and try to withdraw $100 and see if they will allow the withdrawal and issue you a check (and an associated 1099-R in January).

Sure you may have to pay the penalty, but at least you will have peace of mind.

-gauss

 

[gauss]

You could also do a 72t as your withdrawal strategy it sounds like a good fit.

What would be the advantage of a 72t withdrawal plan over a regular withdrawal if he qualifies for the "rule" of 55?

Are all plans required to offer withdrawals if they are based on a 72t plan where they would not be required otherwise?

Seems like a 72t would be a potential minefield if the "rule" of 55 applies (assuming that everything else is the same).

-gauss

 

[MRG]

What would be the advantage of a 72t withdrawal plan over a regular withdrawal if he qualifies for the "rule" of 55?

Are all plans required to offer withdrawals if they are based on a 72t plan where they would not be required otherwise?

Seems like a 72t would be a potential minefield if the "rule" of 55 applies (assuming that everything else is the same).

-gauss

Only as plan B, sorry I should have been clearer.

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[ziggy29]

What would be the advantage of a 72t withdrawal plan over a regular withdrawal if he qualifies for the "rule" of 55?

None, IF the 401K plan allows flexible withdrawals on demand. Not all 401K plans do.

Well, *almost* none. An IRA has more flexibility in investments and probably lower cost funds, but if the 401K plan allows a lot of flexibility in withdrawals, it's probably easy to deal with until age 59 1/2.

 

[laurence]

Yes it's a flexibility/convenience thing. Her401k is pretty good (vanguard funds yay), the key is the rental gets paid off in the early 60s giving us a bit of a pop on income, and the primary house as well, lowering expenses. T72 is the plan b, just a bit more restrictive. We are more risk tolerant than this board. Same time, who knows what 120% of 10 year note will be in 15 years?

 

[lhamo]

We had this same question about my DH's 403b (he left service in January at age 57). His plan/administrator allows him to make partial withdrawals of any amount, but anything over $100k requires that he get a medallion signature on the paperwork and the withdrawal needs to be approved by his former employer as well.

Just be sure that you don't roll her account over to an iRA -- if you do that you lose the rule of 55 advantage and will be charged penalties on any withdrawals before age 59.5

 

[Dwhit]

I used my 401k to finance my retirement till I can withdraw from an IRA. Mine was with Principal, and I could make withdrawals on the Internet. They had an automatic withholding of 20% for fed tax and 5% for state. It took about 10 days from Internet request till the funds showed up in my bank account. You could only have one request active at a time, and there was a $50 fee per transaction

No restrictions on amount of withdrawal, so long as there was money in the account. In fact, I recently withdrew a pretty big chunk to help my mother in law buy a house down the street from us.

That was my experience, but as others have said, you have to confirm the specific rules of your own plans.

 

[supernova72]

I see some posts say "not all 401K plans allow this without penalty" but I believe it's stated in the IRS pub 575 the way I read it? It's way down on page 35.

https://www.irs.gov/pub/irs-pdf/p575.pdf

Additional exceptions for qualified retirement
plans. The tax does not 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) (see Separation from service, later),
From a qualified retirement plan (other than an IRA) to
an alternate payee under a qualified domestic relations
order,
From a qualified retirement plan to the extent you
have deductible medical expenses that exceed 10%
(7.5% if you or your spouse were born before January
2, 1950) of your adjusted gross income, whether or
not you itemize your deductions for the year,
From an employer plan under a written election that
provides a specific schedule for distribution of your
entire interest if, as of March 1, 1986, you had separated
from service and had begun receiving payments
under the election,
From an employee stock ownership plan for dividends
on employer securities held by the plan,
From a qualified retirement plan due to an IRS levy of
the plan, or
From elective deferral accounts under 401(k) or
403(b) plans, or similar arrangements, that are qualified
reservist distributions.
Phased retirement annuity payments made to federal
employees. See Pub. 721 for more information on the
phased retirement program.

 

[gauss]

Yes - as long as your employer/qualified plan will give you a distribution (as determined by the written rules of the plan found in the Summary Plan Document (SPD) ) it will be processed (by you) as tax free on your tax return if you meet the requirements.

The employer is not in the business of determining/accessing early-withdrawal penalties. This is between you and the IRS>

Box 7 on 1099-R will have a code 1 or code 2 if you are under age 59 1/2 for early withdrawal (no known exception '1') or (exception applies '2').

If they improperly give you a code '1' on the 1099-R box 7 then it should be an easy fix via form 5329 to correct this (no need to press for a "corrected" 1099R).

I would retain a written letter from my employer confirming the date of separation which could be used to document to the IRS (along with your age at the time) that you qualify for the penalty-free treatment.

-gauss

 

[laurence]

The best part of this research is I discovered you can take withdrawals "the same calendar year that you turn 55", and DW was born in December. So she's looking forward to separating from the company when she's 54 and 1 month! Heck, she always has a ton of vacation on the books, maybe we can make her last day in the office before Christmas that year!

 

[supernova72]

Yes - as long as your employer/qualified plan will give you a distribution (as determined by the written rules of the plan found in the Summary Plan Document (SPD) ) it will be processed (by you) as tax free on your tax return if you meet the requirements.

The employer is not in the business of determining/accessing early-withdrawal penalties. This is between you and the IRS>

Box 7 on 1099-R will have a code 1 or code 2 if you are under age 59 1/2 for early withdrawal (no known exception '1') or (exception applies '2').

If they improperly give you a code '1' on the 1099-R box 7 then it should be an easy fix via form 5329 to correct this (no need to press for a "corrected" 1099R).

I would retain a written letter from my employer confirming the date of separation which could be used to document to the IRS (along with your age at the time) that you qualify for the penalty-free treatment.

-gauss

Thanks for the clarification. If I had a nickel for each time I heard "you need to wait until you are 59.5" I would have ER'd 10 yrs ago! Ha.

 

[gauss]

Thanks for the clarification. If I had a nickel for each time I heard "you need to wait until you are 59.5" I would have ER'd 10 yrs ago! Ha.

You will need to verify in your SPD/plan documents that your plan allows withdrawals before age 59 1/2 and if so under what conditions (ie single lump sum only, etc). -gauss

 

[MuirWannabe]

I've just finished reading my SPD for the first time. It's silent on the age 55 question for distributions. It simply says you can make distributions anytime before age 65. After 65 you must begin distributions. That seems like a strange statement.


The other strange item is that the only form of distribution is a lump sum payment. So apparently when I withdrawal from my 401K, I have to withdrawal all of it. There is no other way.


Almost wonder if I'm interpreting this correctly.


Muir

 

[bwtroutster]

Defined Benefit Plan

When I retired at 57 the company plan specified one withdraw at 55 prior to rollover. I calculated how much I would need with some cushion to make it to 59 1/2. This was a one time shot without penalty. Could not take more than the years used for SS life expectancy per year\401K balance. Read her company defined benefits plan.