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Age of 55 rule question
Old 08-17-2017, 11:47 AM   #1
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Age of 55 rule question

Does anyone have experience or expertise with the age of 55 rule on a qualified plan? I hope to retire soon, within a year I hope. Most of my money is tied up in pre-tax accounts. An IRA and my employers defined contribution plan. I have been taking roll over distributions annually from the employers plan for a while but when I leave I thought about using the 55 rule to get a chunk of cash to help get us through the period until I'm 59-1/2 and avoid the 10% penalty. I'm 56-1/2 now, so a couple years or so. Our plan qualifies for the 55 rule. My question is this, is the use of the 55 rule a one time deal? I will be receiving payment from our plan annually for 10 years until I'm paid out fully. That will roll over into an IRA. Is it possible to use the rule on more than 1 annual distribution? If that is allowable it would make my life a lot easier and my career a lot shorter.
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Old 08-17-2017, 12:08 PM   #2
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Need more info. Is this a 401k?

Did you read your plan's SPD?
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Old 08-17-2017, 12:23 PM   #3
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I'm doing it now and it's not very well understood I've found out. If you search IRS pub 575 it will spell it out (or your company SPD). Basically in the year you turn 55 and you have officially retired (separated from the company) you can draw without the 10% penalty.

The confusing part is this is NOT the same as the "72T' rule. That is totally different.
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Old 08-17-2017, 12:25 PM   #4
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Every age-55 deal is exquisitely plan specific. Even if a plan qualifies for it, does not mean a plan allows it. So you won't get any definite answer from the internet.

Unfortunately, you may not get a definitive answer from the people who administer your plan because they may not have ever had anyone use the rule. You may have to dig it out from them and by reading your own plan documents to decipher what is allowed for you personally.
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Old 08-17-2017, 12:46 PM   #5
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The plan is an ESOP. My adviser has researched it with his contacts and agrees the plan qualifies. We have a upcoming meeting with a few high share holders and one of the rumored topics is the 55 rule. Sounds like our plan will qualify and allow it. I just don't know if the IRS, or our plan for that matter, will allow it annually or if its one and done.
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Old 08-17-2017, 12:49 PM   #6
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It will vary from 401k plan to plan. Some allow regular distributions, others require a lump sum for early withdrawal. Your summary plan documents should have the answer. If not, call the custodian company and ask.
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Old 08-17-2017, 12:55 PM   #7
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From my understanding, assuming your plan allows the Rule of 55, the withdrawal options would inherently default to whatever your plan provider/administrator currently allows (monthly, qrtly, etc.). That being said, I've always pondered how a documented IRS Reg could be "trumped" by lower tier plan rules not allowing the Fed rule to apply. 72T options are a bit trickier assuming you can't invoke the 55 rule. My plan (401k Vanguard) doesn't explicitly address the Rule of 55, it's silent except it defers to "other IRS regulations as they may apply"......
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Old 08-17-2017, 01:19 PM   #8
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I've thought about the 72T but would rather avoid it if I can. Sort of restrictive. Our ESOP pays out annually so I know that would be the case. I'm assuming I could take a portion of the distribution to the 55 rule and the balance to a rollover. If I could do that annually for 3 years I'd be golden to go whenever I want. Probably at the end of this year. This is the stuff that keeps me awake at night.
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Old 08-17-2017, 01:46 PM   #9
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I used the 55 rule several times taking money out of my Vanguard 401K. My plan allowed for unlimited distributions. Some plans might allow annual distributions only. And some plans might not allow any early distributions (before 59 1/2). Just depends on the plan.
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Old 08-17-2017, 02:55 PM   #10
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Originally Posted by PatrickA5 View Post
I used the 55 rule several times taking money out of my Vanguard 401K. My plan allowed for unlimited distributions. Some plans might allow annual distributions only. And some plans might not allow any early distributions (before 59 1/2). Just depends on the plan.
Ding, ding, ding!

I used it. I had to explain it to the first Megacorp HR person after that it was smooth sailing. The custodian had no restrictions on withdrawal. I could have had them send me a monthy check if I wanted.

However not all plans are so friendly.
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Old 08-17-2017, 07:48 PM   #11
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I used the 55 rule several times taking money out of my Vanguard 401K. My plan allowed for unlimited distributions. Some plans might allow annual distributions only. And some plans might not allow any early distributions (before 59 1/2). Just depends on the plan.
Wow that would be awesome if I could do that. I'm looking forward to this meeting and asking a few questions. It's good to know that someone has done it. I was concerned if the IRS would even allow it.
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Old 08-17-2017, 08:11 PM   #12
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I was approaching ER at 55 so I asked our small company HR people and they were clueless. After checking again the HR people said our 401k plan with Mass Mutual was qualified (allowed age 55 withdrawals penalty free). 3 months later I retire and asked MAss Mutual directly and was told only employer match funds were eligible for distribution (fraction of act value) under our plan's age 55 rule. That bothered me but moral of story, like others are saying above, is study your Plan Summary docs, ask questions, and get more than one party giving you consistent answers. Very few people can even relate to early retirement much less these hidden gems on how to do it penalty free.
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Old 08-18-2017, 04:38 AM   #13
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many plans do not allow partial distributions at 55. you can only rollover the whole thing in one shot to an ira but then you have to 72t it .

but you can do that at any age if you leave the company and they allow access so 55 is nothing special in that case . .
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Old 08-18-2017, 06:56 AM   #14
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SPD. SPD. SPD.

https://www.nceo.org/articles/rights-esop-participants

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All ESOP sponsors must provide a document to all employees explaining the rules of the ESOP, including how and when they become participants, how and when they get their ESOP benefits distributed to them, how they can take actions to question or complain about ESOP operations, and names and addresses of the sponsor and fiduciaries. All ESOP participants must receive the document within 90 days of becoming a participant, and the SPDs must be updated when material amendments are made, or, if there are none, every five years. The document is supposed to be written so that employees can understand it, but, at the same time, must be comprehensive.
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Old 08-18-2017, 07:24 AM   #15
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Originally Posted by PatrickA5 View Post
I used the 55 rule several times taking money out of my Vanguard 401K. My plan allowed for unlimited distributions. Some plans might allow annual distributions only. And some plans might not allow any early distributions (before 59 1/2). Just depends on the plan.
This is great news for me. Mega in the middle of transferring 401K plan from Principal to Vanguard. We have a meeting next week. I will be surprised if our HR will be able to answer the question.
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Old 08-18-2017, 08:02 AM   #16
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It's interesting that this seems to be so plan specific. I would have imagined that the IRS would completely specify how the 55 rule was applied. Maybe individual plans could opt in out out but the nuts and bolts would be the same for how, when, how often, etc. that it could be applied. I have a copy of the SPD, I'll have to read through it again. I have looked at it before but I don't ever recall the 55 rule ever being mentioned one way or the other.
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Old 08-18-2017, 08:15 AM   #17
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It's interesting that this seems to be so plan specific. I would have imagined that the IRS would completely specify how the 55 rule was applied. Maybe individual plans could opt in out out but the nuts and bolts would be the same for how, when, how often, etc. that it could be applied. I have a copy of the SPD, I'll have to read through it again. I have looked at it before but I don't ever recall the 55 rule ever being mentioned one way or the other.
Mine was in a section on hardship withdrawal(55 and older and terminated from service). Good luck.
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Old 08-18-2017, 07:48 PM   #18
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It's interesting that this seems to be so plan specific. I would have imagined that the IRS would completely specify how the 55 rule was applied. Maybe individual plans could opt in out out but the nuts and bolts would be the same for how, when, how often, etc. that it could be applied. I have a copy of the SPD, I'll have to read through it again. I have looked at it before but I don't ever recall the 55 rule ever being mentioned one way or the other.
It's quite possible the plan doesn't say anything about a "rule 55" distribution.

The 55 rule is just an exception allowed by the IRS to the 10% penalty if it's a "qualified plan" AND you terminate in the year you turn 55 (or later). As long as you meet those two criteria AND you can actually get money out of your plan than you should qualify for the exception. The 1099R will probably be coded with a code "1" (early distribution). It would be up to you to file form 5329 showing the proper exception to the penalty.

From the IRS website:

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
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Old 08-19-2017, 11:22 AM   #19
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It's quite possible the plan doesn't say anything about a "rule 55" distribution.
Good point. My SPD is very slim on this, as you describe.

My SPD gives rules for distributions: monthly, quarterly or yearly.

Then the next section is titled "Early distributions" and says you'll get a 10% tax penalty unless: ... and then it lists exceptions. One of the exceptions is "separation from service at or after age 55".

So those 8 words are all it says about the exception in a 40 page document.
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