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another age 55 401K question
Old 08-22-2017, 12:04 PM   #1
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another age 55 401K question

My mega is switching from Principal to Vanguard. (Yippee) Today we had our brief by the Vanguard rep. I asked the 55 question. At first she said she didn't know. Later she said no (I really don't think she knows). After the brief I spoke to HR. They didn't know for sure and still didn't have the SPD from corporate. I am waiting to receive that document.

Here is my question: Let's say the plan doesn't allow it. If at say 56 I want to take money out, pay taxes and incur the 10% penalty I can do that right? If the IRS allows the withdrawal at 55 then how could the IRS then penalize me 10%? Can the mega tell the IRS that it isn't allowed and then the IRS charges me the 10% penalty even though they themselves allow withdrawal at 55? Or would Vanguard just not let me take anything until 59.5? I have already informed management that if the SPD says that we can not withdraw at 55 I want to challenge that and ask the question why?
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Old 08-22-2017, 12:14 PM   #2
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Quote:
Originally Posted by Bigdawg View Post
My mega is switching from Principal to Vanguard. (Yippee) Today we had our brief by the Vanguard rep. I asked the 55 question. At first she said she didn't know. Later she said no (I really don't think she knows). After the brief I spoke to HR. They didn't know for sure and still didn't have the SPD from corporate. I am waiting to receive that document.

Here is my question: Let's say the plan doesn't allow it. If at say 56 I want to take money out, pay taxes and incur the 10% penalty I can do that right? If the IRS allows the withdrawal at 55 then how could the IRS then penalize me 10%? Can the mega tell the IRS that it isn't allowed and then the IRS charges me the 10% penalty even though they themselves allow withdrawal at 55? Or would Vanguard just not let me take anything until 59.5? I have already informed management that if the SPD says that we can not withdraw at 55 I want to challenge that and ask the question why?
You can take it out now. You get the penalty. So to Vanguard, they won't stop you.

They will have the proper box checked or unchecked for the IRS. This is the key.
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Old 08-22-2017, 12:17 PM   #3
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You can take it out now. You get the penalty. So to Vanguard, they won't stop you.

They will have the proper box checked or unchecked for the IRS. This is the key.
So it is up to the plan administrator to tell the IRS to charge me the 10% even though it is an IRS rule?
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Old 08-22-2017, 12:46 PM   #4
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The 1099-R that you will get for the withdrawal will have a distribution code in Box 7 which the IRS will use to know what to charge you.

You should see if you can rollover some, but not all, of your 401(k) into an IRA. Of course, you can rollover all of it, but with a partial rollover you might find it simpler to do a 72(t) SEPP. Of course, the annual withdrawal with a 72(t) SEPP is limited to an actuarially small amount so that you won't run it into the ground over your lifetime even if you want to run it into the ground in 5 years. I always thought that was good though.
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Old 08-22-2017, 01:36 PM   #5
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And if the 1099-R is incorrect you're still actually obligated to have it corrected. I don't know what measures are in place to cross-check such things. Perhaps is it is an audit trigger?
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Old 08-22-2017, 05:56 PM   #6
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IT does sound crazy doesnt it? I can retire at 55- actually in the year i turn 55, and access 100% of the $ in my present employers 401k- penalty free ( they allow it) ! but if i have 2 million $ in an IRA, i cannot touch it until i'm 59 1/2. That is the GUBMINT for Ya!
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Old 08-22-2017, 06:13 PM   #7
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IT does sound crazy doesnt it? I can retire at 55- actually in the year i turn 55, and access 100% of the $ in my present employers 401k- penalty free ( they allow it) ! but if i have 2 million $ in an IRA, i cannot touch it until i'm 59 1/2. That is the GUBMINT for Ya!
A 72T works.
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Old 08-22-2017, 07:40 PM   #8
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A 72T works.
true, but if you do a 72t you are locked in to the specified withdrawl for 5 years or until age 59 1/2 whichever is longer. if the $ is in 401k you can do whatever you want
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Old 08-22-2017, 08:20 PM   #9
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I have a Vanguard-administered 401k. I asked about doing a partial withdrawal. They don't allow it. It's all or nothing. (I was hoping to roll some out to an IRA for Roth conversion, without losing the ERISA protection on the whole lot.)

I suspect you can get 100% of your 401k out penalty-free post age 55, but maybe not a fraction. Maybe you could roll the unused portion into an IRA in the 60-day window. Better check though if you have a big 401k because if the above is wrong, it could be a tax disaster.
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Old 08-22-2017, 10:16 PM   #10
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I have a Vanguard-administered 401k. I asked about doing a partial withdrawal. They don't allow it. It's all or nothing. (I was hoping to roll some out to an IRA for Roth conversion, without losing the ERISA protection on the whole lot.)

I suspect you can get 100% of your 401k out penalty-free post age 55, but maybe not a fraction. Maybe you could roll the unused portion into an IRA in the 60-day window. Better check though if you have a big 401k because if the above is wrong, it could be a tax disaster.


This would be determined by the employer, not Vanguard. I think some custodians leverage employers to discourage partial withdrawals and rollovers so I wouldn't be surprised if finger pointing is involved.
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Old 08-22-2017, 10:27 PM   #11
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Here is my question: Let's say the plan doesn't allow it.
The age 55 no penalty rule is an IRS rule. It's between you and the IRS on your tax return. The employer only controls whether you can take money out after you no longer work there, which is usually yes. Once you already separate they don't care how old you are.
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Old 08-22-2017, 10:27 PM   #12
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Quote:
Originally Posted by Bigdawg View Post
My mega is switching from Principal to Vanguard. (Yippee) Today we had our brief by the Vanguard rep. I asked the 55 question. At first she said she didn't know. Later she said no (I really don't think she knows). After the brief I spoke to HR. They didn't know for sure and still didn't have the SPD from corporate. I am waiting to receive that document.

Here is my question: Let's say the plan doesn't allow it. If at say 56 I want to take money out, pay taxes and incur the 10% penalty I can do that right? If the IRS allows the withdrawal at 55 then how could the IRS then penalize me 10%? Can the mega tell the IRS that it isn't allowed and then the IRS charges me the 10% penalty even though they themselves allow withdrawal at 55? Or would Vanguard just not let me take anything until 59.5? I have already informed management that if the SPD says that we can not withdraw at 55 I want to challenge that and ask the question why?


The SPD is the key. You should get copies of SPD for new and old custodian to compare. It's possible some features of the old plan were overlooked when the custodian changed. That's what happened to us. Now is a good time to press your employer to include this feature. I'm disappointed that the VG rep was not more knowledgeable. As others have said you will be able to withdraw and the penalty determination depends on how the 1099 is coded by Vanguard. Everything I've seen is unclear on whether the employer can deny the age 55 exception.
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Old 08-23-2017, 01:34 AM   #13
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The IRS rule allowing age 55 and older withdrawals from a 401k applies only if you are age 55 or older when you leave your employer.
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To qualify for the penalty exception, separation from service must occur in the year the person turns age 55 or older.
https://www.irahelp.com/slottreport/...etirement-plan
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Old 08-23-2017, 07:56 PM   #14
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The 55 Rule is an IRS rule. I may be wrong about this, but I'm pretty sure that as long as the company allows distributions, you should be able to claim the distribution penalty free (as long as you meet the age requirement and the plan is a qualified plan such as 401K, etc).

The company SHOULD use a 1099R Code 2 (2—Early distribution, exception applies), but might code it as Code 1—Early distribution, no known exception. In that case, you can request a corrected 1099R or fill out Form 5329 and put in the appropriate code in Section 1, line 2.
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Old 08-26-2017, 10:50 PM   #15
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A 72T works.
If the 55 separation/withdrawal is disallowed, this is a good solution, as long as OP does the withdrawals correctly.
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