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Old 10-08-2017, 04:11 PM   #21
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You had mentioned about looking to ER in the next few years.

One of the disadvantages of moving a 401k to an IRA is that you loose access to the ability to take distributions prior to age 59 1/2, in some case, without incurring a 10% penalty.

I am specifically referring to the so-called "Rule of 55" as it is commonly referred.

Quote:
The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

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, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (state or local government) who separated from service in or after the year you reached age 50.
There may be good reasons, despite this, to roll the funds over. These good reasons IMHO would include high-fees in the 401k or very limited choices of investments.

If this is not the case, then the "Rule of 55", the possible additional susceptibility of funds in an IRA to creditors/law suites (state specific), and the possible availability of "stable value" funds in the 401k are all unique advantages to the 401k over and IRA.

You must remember that that financial industry has spent huge amounts of money to encourage former employees to rollover 401ks to IRAs. This was also in an era when large fees and lousy choices in 401ks may have been more common.

-gauss
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Old 10-08-2017, 04:28 PM   #22
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The "rule of 55" will not apply to the old 401(k) and may not apply to the current 401(k). While the IRS allows it, the employer plan does not have to allow it.
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Old 10-08-2017, 05:11 PM   #23
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Originally Posted by LOL! View Post
The "rule of 55" will not apply to the old 401(k) and may not apply to the current 401(k). While the IRS allows it, the employer plan does not have to allow it.
edit: Agreed, Rule of 55 will not apply to former 401(k) unless the funds are rolled over to the new employers 401(k) AND the new 401(k) allows distributions/withdrawals prior to age 59 1/2. Rule of 55 only applies to 401k(s) of current employer.

--
Do you have any source for these claims?

Are you suggesting the 401k will not allow any distributions prior to age 59 1/2 even for former employees?

The employer does not have to affirmly say "yes you can apply the rule of 55 to this distribution", but merely has to offer the distribution.

It is up to the taxpayer to determine if the rule applies and this occurs on IRS Form 5329 Line 2 (at least when the employer issues a code 1 in box 7 on 1099-R as opposed to explicitly recognizing the exception and offering code 2.
edit: And of course, the taxpayer needs to interpret the law correctly when doing so.

I am truly interested where these claims (not just yours) that the rule of 55 does not apply to employer 401k plans arise from. Perhaps the laws/regulations were different at some point in the past.

-gauss
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Old 10-08-2017, 06:16 PM   #24
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Originally Posted by gauss View Post
edit: Agreed, Rule of 55 will not apply to former 401(k) unless the funds are rolled over to the new employers 401(k) AND the new 401(k) allows distributions/withdrawals prior to age 59 1/2. Rule of 55 only applies to 401k(s) of current employer.



--

Do you have any source for these claims?



Are you suggesting the 401k will not allow any distributions prior to age 59 1/2 even for former employees?



The employer does not have to affirmly say "yes you can apply the rule of 55 to this distribution", but merely has to offer the distribution.



It is up to the taxpayer to determine if the rule applies and this occurs on IRS Form 5329 Line 2 (at least when the employer issues a code 1 in box 7 on 1099-R as opposed to explicitly recognizing the exception and offering code 2.

edit: And of course, the taxpayer needs to interpret the law correctly when doing so.



I am truly interested where these claims (not just yours) that the rule of 55 does not apply to employer 401k plans arise from. Perhaps the laws/regulations were different at some point in the past.



-gauss


In my case, my current employer 401(k) does have the rule of 55, however I do not have much in that account yet and I plan on retiring before 55. If I understand this rule, you have to still be employed during the year you turn 55 to be eligible... please correct me if I am wrong.

I believe I read in a different post that you could withdraw the principle in a Roth prior to 59.5. Is that true?
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Old 10-08-2017, 06:45 PM   #25
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Originally Posted by Erbragg1 View Post
In my case, my current employer 401(k) does have the rule of 55, however I do not have much in that account yet and I plan on retiring before 55. If I understand this rule, you have to still be employed during the year you turn 55 to be eligible... please correct me if I am wrong.

I believe I read in a different post that you could withdraw the principle in a Roth prior to 59.5. Is that true?
Correct on both points. That is my understanding also.

Note that on the Roth, the principal is handled differently for Roth contributions vs any Roth Conversions (or rollovers from employer plans).
Contributions come out first. Page 2 of IRS From 8606 gives all the gory details on Roth Distributions in Part 3.

-gauss
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Old 10-08-2017, 08:17 PM   #26
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So, here is the deal... I am almost 49 (and planning on staying at 49 forever). I have a little over $2.25M not including the house. I am looking to RE in 2020-21 timeframe if possible. I will need a bit of help with a strong stock market for a few years to do it.

The issue I would like some help/advice on is how (or even if) to consolidate my accounts to make it easier to see my full financial picture better and what are the pitfalls of doing so.

I currently have $2.25M scattered as follows:

$950K in Fidelity Traditional IRA
$50k in Fidelity current company 401(k)
$225K in former company's 401(k)
$215K in Vanguard IRA (75% of which is Roth)
$175K in DW's Thrift Savings
$110K in DW's Roth with Federated Funds
$65K in 529 for kids college
$55K in TD Ameritrade Brokerage account
$355K in 8 different Dividend Reinvestment Accounts
$95K in cash, CDs, savings in 5 accounts

All totaled, this money is in 21 accounts. It takes me a few hours each month just to look up all of my balances and add up how I am doing. Any thought or advice on how to simplify? Should I? Are there any hidden tax gotcha's if I do?
I consolidated all accounts to Schwab but still have 7:
♤ Roth
♡ all 401k & 457 to 1 rollover IRA
◇ Brokerage acct
♧ Legacy account (also brokerage) but for GKs to inherit or their school -- think "527" ish
☆ Schwab gives me a checking account
○ USAA -- Checking & savings

Makes it incredibly easy to monitor

For you it might be:
1. Rollover IRA - $950K in Fidelity Traditional IRA, 225 former 401k, $215K in Vanguard IRA
2. Roth
3. Her ROTH
4. $50k in Fidelity current company 401(k)
5. $175K in DW's Thrift Savings
6. $65K in 529 for kids college
7. Brokerage - transfer in $55K in TD Ameritrade Brokerage account, $355K in 8 different Dividend Reinvestment Accounts, CDs
8. $95K in cash, Checking
9. savings

Combined 28 (?) into 9. Still a lot but not as overwhelming



And yes you can withdraw the principle in the Roth plus look up the 72t rules on the IRS website. If you SEPP it out you may still take IRA withdrawals at 55
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Old 10-08-2017, 10:25 PM   #27
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Originally Posted by Erbragg1 View Post
In my case, my current employer 401(k) does have the rule of 55, however I do not have much in that account yet and I plan on retiring before 55. If I understand this rule, you have to still be employed during the year you turn 55 to be eligible... please correct me if I am wrong.

I believe I read in a different post that you could withdraw the principle in a Roth prior to 59.5. Is that true?
While you could take the money out of a ROTH, that would be a lot worse (in my opinion) than taking the money out of an IRA (even if you roll the 401K into the IRA). You do it by the rule of 72t.

ROTH accounts are more valuable than IRA accounts (in my opinion).
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Old 10-08-2017, 11:37 PM   #28
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The OP listed $500K in non-retirement accounts that can be withdrawn anytime without any penalties. Thus they don't need to take any money from a 401(k) nor an IRA nor TSP before age 59.5 anyway.
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Old 10-09-2017, 01:07 AM   #29
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If your 401K accepts roll ins and if it meets your
investing needs at a low cost, you might consider
rolling your tIRA accounts into your 401K. That is
what I did when I consolidated accounts a few years
ago. I am a simple index fund investor and my
employer's 401K with Fidelity has incredibly cheap
index investment trusts as options that meet my
investment needs. The advantage I gained, besides
the ones mentioned above was to enable "backdoor"
Roth IRA contributions without pro-rata taxes due.

I also use my Fidelity 401K to do "mega backdoor" Roth
conversions. Since the OP has their 401K with Fidelity,
it might be useful to check if it allows "mega backdoor"
Roth conversions. Mine does and Fidelity CSR's are very
knowledgeable about the steps to complete it. Since the
OP has a large nestegg outside of retirement accounts, the
mega backdoor could be a useful way to get more assets
into a tax free Roth even if they don't have the income to
make the deferrals from salary. Roth space is very valuable
and worth the effort to get as much into a Roth as possible,
IMO.
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Old 10-09-2017, 06:30 AM   #30
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Oh, before you decide where you are consolidating, be sure to ask what type of incentives are available. Most of the big brokerages except vanguard seem to always have something either cash or free trades, or points.
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Old 10-09-2017, 09:10 AM   #31
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Originally Posted by LOL! View Post
The OP listed $500K in non-retirement accounts that can be withdrawn anytime without any penalties. Thus they don't need to take any money from a 401(k) nor an IRA nor TSP before age 59.5 anyway.
I wonder why OP was asking about ability to withdraw from ROTH then, it suggests to me he thinks the 7.5 years prior to 59.5 will be needing more than $500K ?
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Old 10-09-2017, 04:15 PM   #32
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If your 401K accepts roll ins and if it meets your
investing needs at a low cost, you might consider
rolling your tIRA accounts into your 401K...
One thing to note when rolling money into your 401K...the funds may still be segregated by source in the statements and reports. I rolled 401K funds from my first megacorp to MegacorpX, and MegacorpX got bought by my last megacorp, so that automatically rolled-in.

So now, when I get charged $2.66 per month, and when I run the detailed report, that takes fractional shares out of 9 different buckets:
  • Rollover
  • Roth Rollover
  • Before Tax
  • MegacorpX Company Match
  • MegacorpX Employer Contribution
  • ESOP
  • Roth 401(k)
  • Company Automatic Feature
  • After Tax
Someone is probably thinking "well, at least just withdraw the after tax", but since I've got some of this in the brokerage sub account, they won't let me drain the small after tax bucket....I'd have to liquidate my brokerage positions, transfer it back to the mother ship, and only THEN could I drain some of those buckets with the smaller amounts in them.
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Old 10-09-2017, 09:17 PM   #33
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I wonder why OP was asking about ability to withdraw from ROTH then, it suggests to me he thinks the 7.5 years prior to 59.5 will be needing more than $500K ?


Yes, I am considering options along those lines. My dilemma is bridging the gap between ER and 59.5. I don't have enough post tax money to bridge the gap if I ER at 52. My options are to find a creative way to pull out money from tIRA or Roth early. Either has big downsides. Another option would be to cash out refi the house.
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Old 10-09-2017, 09:20 PM   #34
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Perhpas you can do a 72t and taxable and cash-out refi.... save the tax-free status of the Roth if you can.
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Old 10-09-2017, 10:27 PM   #35
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Originally Posted by Erbragg1 View Post
Yes, I am considering options along those lines. My dilemma is bridging the gap between ER and 59.5. I don't have enough post tax money to bridge the gap if I ER at 52. My options are to find a creative way to pull out money from tIRA or Roth early. Either has big downsides. Another option would be to cash out refi the house.
Here is a site that explains 72t rule, and how you can take out IRA money without penalty earlier than 59.5

It includes the point about setting up an IRA with enough, but not too much money in it so you get what you want for the years that you must or want to take out the withdrawals.

72t Distributions for Early Retirement — Required Minimum Distribution

This would allow you to save your ROTH, which IMHO is most valuable.
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Old 10-10-2017, 08:56 AM   #36
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Yes, I am considering options along those lines. My dilemma is bridging the gap between ER and 59.5. I don't have enough post tax money to bridge the gap if I ER at 52. My options are to find a creative way to pull out money from tIRA or Roth early. Either has big downsides. Another option would be to cash out refi the house.
I was originally in the same spot. Kind of a pain not to have the flexibility of after tax funds to spend, but it's great for college grants, if you've got kids in college. But since I retired, I had a 401k tappable at age 55. And a few years later DW turned 59.5, so we're out of that woods on that front. But I did/do have the HELOC as a possibility, still, because we're up against the PPACA subsidy, so still taking it easy on pulling money that shows as income.

If you run i-orp, it will give you what it thinks is a good plan for minimizing the tax bite. And as someone who's run that tool who's in your situation, you might consider leaving off the after-tax "spending money" buffer that you have around...it just makes the output more confusing. Whatever you leave out, just know you've got that buffer through all years.
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Old 10-10-2017, 09:25 PM   #37
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Here is a site that explains 72t rule, and how you can take out IRA money without penalty earlier than 59.5

It includes the point about setting up an IRA with enough, but not too much money in it so you get what you want for the years that you must or want to take out the withdrawals.

72t Distributions for Early Retirement — Required Minimum Distribution

This would allow you to save your ROTH, which IMHO is most valuable.


Great article and very helpful! Thanks so much for helping! I think this may solve my problem!
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