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Confused about pre/post/roth 401K / Rule of 55
Old 01-11-2019, 03:57 PM   #1
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Confused about pre/post/roth 401K / Rule of 55

My main question is has anyone here actually used the Rule of 55 or have experience actually invoking it?

Is this a federal rule/law, meaning that all 401K providers must allow this? Or do you really need to consult the 401K management team supporting your companies 401K plan to see if this option is available? (in my case, that would be Empower).

My general understanding is the 401K provider doesn't matter in invoking this option -- you just sign some federal form to the IRS indicating you're invoking this option, since you comply with the requirement (of leaving/retiring the company sponsoring your 401K in the year you turn 55; in which case no early-withdrawal penalty is involved).



In my case, I do full pre-tax 401K contributions. Can "rule of 55" apply to a Roth 401K as well? Are they separate accounts with their own ~$18K contribution limit, or is it a combined contribution?
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Old 01-11-2019, 04:07 PM   #2
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Do an internet search on 72T distributions. That should get you everything you need to know.
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Old 01-11-2019, 04:20 PM   #3
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55 rule is not part of 72T. I have used the rule you are referring to. If you retire at age 55 or greater, any amounts in your 401k plan that are distributed to you, as opposed to being rolled over, are not subject to the 10% penalty. They are subject to regular taxes.

So, you retire at age 55 or 56-59 1/2. Say you have $100,000 in your regular 401k. Say you are in 12% tax bracket. You have $10,000 distributed to you. Rest is rolled over into an IRA. Tax would be $1,200, federal.

If you retire at age 54, then one year later take $10,000 out of that 401k, your federal tax would be $1,200 plus $1,000.
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Old 01-11-2019, 04:58 PM   #4
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Ok, the extra $1000 is because of declaring retirement early (before 55).

But if you were 55+ and the 401K was from a different/prior company, then that would also cause the penalty fee?

(but can't you always request to move your current 401K over to your new employer, assuming the new company also offers a 401k? My wife did this because her old hospital closed, so she went to work for the one next door -- it was a different company, but only took a couple months to mail some checks and sign some paper to get her 401K transferred over to the new company; in other words, there is no excuse to not have all of your 401K with your current employer, again assuming it is an employer that offers a 401k at all {or I guess unless a prior employer had some exceptional plan/option in their 401k that you didn't want to lose by transferring it -- but for the most part, 401K's seem to offer the same basic plans unless you go self-managed} )


You don't have to distribute/rollover all of the 401K once you declare retirement, do you?

I mean, in your example, why would you roll the rest over to an IRA after the $10K distribution? Why not just keep it in the 401K, so you can do another distribution next year (at age 56, 57, 58, 59 -- then just roll things over at 59.5, since that's the age requirement for IRAs anyway)?

Or this Rule of 55 can only be used once, at the time of actually declaration of retirement (or quiting/fired from your job at age 55)? (I know there are a lot of online information about these things, but I'm trying to see the actual mechanics of it from someone whose actually been through it -- in case I'm missing certain detail)


[ and djsander , I understand -- I think you're implying rule of 55 is moot due to just using 72t instead; but maybe that's my key misunderstanding, on whether this rule of 55 is just once-only, or each year between 55-59 ]
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Old 01-11-2019, 05:51 PM   #5
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You really need to check with your 401K plan, some have very restrictive withdrawal options. Even if the withdrawals are penalty free at 55 you may have to schedule fixed monthly withdrawals with the ability to only make changes to that amount annually. Not all plans offer the flexibility to pull out money only when you need it.
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Old 01-11-2019, 06:03 PM   #6
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How you move the money is dependent on your 401k plan and your finances. In my case, my company only allowed one distribution once you are retired. So, I looked at what I thought my taxable income was going to be and decided that without a paycheck, I could backfill some tax bracket.

Mine was all untaxed payroll withholdings and earnings. I don't know if your money is pre/post tax, roth, whatever. I mention this because you mentioned hospital (could be a 403b plan), pre and roth.

I don't know if the tax laws allow multiple 55 and over exclusions. I have never seen a plan that allows more than one post retirement distribution. Although it is possible.

You don't sign an IRS form to use the 55 and over exception. You check the right box in your tax software.

The contribution for retirement plans of this type was $18,000 per year per person. Every so often the limit was raised. So could be higher now. Your plan should be able to tell you. In addition, there is a catchup for those 50 and over. It used to be $5,000 but it has been bumped to $6,000. There is no separate limit for Roth 401k's.

I am responding to your questions, but I would recommend that you read everything your plan sponsor has. In addition, before I pulled the trigger, I would ask some CPA to look at your planned distribution. Advice from strangers on the internet, even brilliant, handsome, athletic ones like you find on here, is good for general guidance, but we do not see all of the documents and therefore wouldn't catch some important detail.
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Old 01-11-2019, 06:26 PM   #7
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I used the rule of 55.

It was specified in the plan's Summary Plan Description under hardship withdrawals. "Age 55 or older and separated from service".

I had to check with the custodian as some have serious limits to frequency and amount. I was lucky and mine was flexible, some you have to take it all at once.

Good luck, if all else fails you can do a 72t.
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Old 01-12-2019, 02:03 AM   #8
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Thanks all, and thanks Z3Dreamer, that's solid advise. At some point I recall finding the specific form on the irs.gov site, so your tax software indirectly might translate into figuratively signing that in digital form (at least being on the their tax record as being applied).

It's interesting that it seems their is no "law" or enforcement for plan providers to accommodate this option in any kind of consistent fashion (if at all); after all, it is an exception -- and now I recall the inconsistency between some being lump sum vs some are drawn out distributions, which makes a pretty big difference.


Thanks for the discussion!
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Old 01-12-2019, 05:02 AM   #9
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To be sure, this Rule only applies to a current employer 401k while working for the company when separating at age 55+.
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Old 01-12-2019, 05:04 AM   #10
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None of the 401(k) plans that my wife and I have ever been involved with allowed this age 55 thing.

Yes, the IRS allows a plan to adopt such a rule, but a plan is not forced to adopt such a rule and the IRS cannot make a plan adopt such a rule.

That does lead to confusion, doesn't it?

Another non-obligatory rule is the idea of an in-service rollover or withdrawal when one reaches age 59.5. In one of my previous 401(k)s, one could have a penalty-free withdrawal if they had reached age 59.5 even if they had not "separated from service." In my wife's plan, no such luck.

This is why one is advised over-and-over-and-over to consult their plan administrator about the particulars for their own plan. Unfortunately, it is often the case that HR people in a company don't even know the details of the plan that the company offers, so one has to get valid info from the plan administrator.
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Old 01-12-2019, 06:19 AM   #11
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Quote:
Originally Posted by voidstar View Post
My main question is has anyone here actually used the Rule of 55 or have experience actually invoking it?

Is this a federal rule/law, meaning that all 401K providers must allow this? Or do you really need to consult the 401K management team supporting your companies 401K plan to see if this option is available? (in my case, that would be Empower).

My general understanding is the 401K provider doesn't matter in invoking this option -- you just sign some federal form to the IRS indicating you're invoking this option, since you comply with the requirement (of leaving/retiring the company sponsoring your 401K in the year you turn 55; in which case no early-withdrawal penalty is involved).



In my case, I do full pre-tax 401K contributions. Can "rule of 55" apply to a Roth 401K as well? Are they separate accounts with their own ~$18K contribution limit, or is it a combined contribution?

I agree with your interpretation of the BOLD part. The question is whether your particular 401k plan will allow (partial) withdrawals/rollovers prior to age 59 1/2. I think most will if you have separated from service, but off hand I am not sure if any regulation governs this for all employers.


Best bet is to get a copy of your plans summary plan description (SPD) and see under what conditions (partial) withdrawals are allowed.


Alternatively, just try to withdrawal a small amount ie $200 and see if they will allow it. You could then roll this amount over to an IRA. Some plans allow "in-service" withdrawals for certain types of funds. Again the SPD would describe this for your plan.

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Old 01-12-2019, 06:26 AM   #12
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None of the 401(k) plans that my wife and I have ever been involved with allowed this age 55 thing.

Yes, the IRS allows a plan to adopt such a rule, but a plan is not forced to adopt such a rule and the IRS cannot make a plan adopt such a rule.

That does lead to confusion, doesn't it?
The plan can explicitly support these "rule of 55" withdrawals, or not mention them at all. If the plan supports it, it will likely code the 1099-R correctly so that any tax software will not apply the penalty.

If the plan does not support the "rule of 55" withdrawal, then the taxpayer will just need to manually fill out the proper IRS form with their tax return (I think it is form 5329) to make the penalty go away if they meet the conditions (ie separated from employer after age 55, etc.)

The real question\, as I suggested above, is under what condition(s) will the plan allow you to withdraw money before age 59 1/2.


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Old 01-12-2019, 07:20 AM   #13
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@gauss, thanks, I see what you mean by looking at Form 5329. And it appears that one can separate from service at age 54 and withdraw --- as long as one is age 55 by 12/31 of that tax year.
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Old 01-12-2019, 07:35 AM   #14
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My understanding is that under Rule off 55, one can quit or retire IN THE YEAR they turn 55, not necessarily BE 55.
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Old 01-12-2019, 08:22 AM   #15
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I quit when I was 54 and pulled money from my 401k. The 1099-R had it coded properly (box 7 : Normal Distribution). It said, right in the plan description, that this was allowed.

Edit: Memory wrong. Box 7: 2-Early distribution, exception applies.
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Old 01-12-2019, 03:30 PM   #16
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The Rule of 55 is a federal exception. However, 401k plan designs vary greatly by employer. I know plenty of HR folks that don't really understand the 401k plan, especially the less used strategies. You need to read the summary plan document (SPD) to be certain the plan will accommodate what you want to do. For example, DH 401k required all participants to remove their funds (i.e. rollover into an IRA) within 6 months of leaving the employer thus the Rule of 55 wasn't an option for him.
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Old 01-13-2019, 06:11 AM   #17
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@gauss is spot on. You don't need permission to withdraw from your 401k if you are separated in the year you turn 55. But the 401k plan can restrict your options.

One caveat I did not see mentioned is if you roll your 401k to an IRA, the rule of 55 no longer applies. So, if you have $1M in your 401k, you are separated in the year you turn 55 and then roll your 401k into an IRA, you CANNOT draw money from the IRA without penalty. You now have to wait until 59.5 or use 72T to withdraw from the IRA.

I am fortunate that my 401k plan allows complete flexibility for withdrawals. I plan to retire @ 55 but won't need my 401k, so I will just do Roth conversions until it's empty. But it would suck if I needed it @ 55 and my only option was a complete withdrawal. No penalty but lots of taxes.
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Old 01-13-2019, 06:49 AM   #18
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When i retired from my company, the SPD did not have the rule of 55 information in it. It took HR a while to get back to me with the info. Our policy was if you did a withdraw, it had to be the whole amount. But we could roll over part and withdraw part also. That is what i did and it worked well. I think it should be spelled out in the SPD.
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Old 01-13-2019, 08:12 AM   #19
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The Summary Plan Description is just that, a summary. By definition, it cannot cover all of the minutia. Ask for a copy of the full 401K plan document. The same goes for Pension Plans, if you have one.

When I left MC, I requested the full document for my Pension Plan. I believed our HR/Benefits people did not know answers to anything but what is commonly asked. I had to pay for the copy, but thought it was money well spent to formulate my plan.

I recommend that everyone with any amount of company-plan money to get the full documents when they leave.
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Old 01-13-2019, 09:39 PM   #20
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I retired at 55 and had both a 401K and a 403B with the company when I retired. The 401K was the smaller and more recent of the two accounts and it allowed only one withdrawal and the rest had to be rolled over. I took my first year's distribution from that account and rolled the remainder into my IRA. The 403B held the lion's share of my tax deferred and it is totally flexible. I have since taken a yearly distribution from the 403B sufficient to supplement my pension. However, the plan actually allows for any frequency of withdrawals of varying amounts if desired. I actually rolled part of the 403B out to an IRA as well and I'm working on Roth conversions on that portion. I left enough in the 403B to tide me over to 59.5, at which time I'll roll the remainder out except for the portion that is in Stable Value.
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