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ER and 401k distributions before 59 1/2
Old 04-14-2014, 08:46 PM   #1
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ER and 401k distributions before 59 1/2

So, I'm really crunching scenarios to be FIRE - and I've asked my current megacorp 401k benefits center about the rules for early distributions from the 401k.

If I can RE - it will be after my 55 birthday while still employed at Megacorp.

So, when I asked the Benefits Center just to confirm that I could make distributions (not a roll over) from the 'qualified Plan' the reply was no - I have to wait until 59 1/2 - otherwise I get hit with the 10% early withdrawal.

I then replied that I have read that you *can* make early withdrawals w/o the 10% penalty as long as I am older than 55 and it is from that 401k.

I got a follow up reply saying, no you can't.

Hmmm...so I checked the IRS Publication 575 and it says I can.

So, should I just say thank you to the Benefits Center and let any penalty be the business of me and the IRS, or can my Megacorp 401K plan administrator really dictate/restrict my distributions if I do retire after 55 and not get anything before 59 1/2?
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Old 04-14-2014, 09:33 PM   #2
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My understanding has been that the ability to take such distributions without penalty varies from plan to plan.

I concede that that Pub 575 sounds more definitive.

I would point out the relevant sections of Pub 575 to your Benefits Center and ask why you have to wait until you are 59 1/2. Be pushy but not obnoxious. You may need to escalate the issue up to the management of the Benefits Center.

If they still say you can't take distributions penalty free then you are taking on some substantial tax risk. They will report it to the IRS as a taxable distribution subject to the 10% penalty. You will report it as penalty-free. The IRS will ask you about ti and the burden of proof will be on you to prove you are right. I'm not sure it is a risk I would want to take.
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Old 04-14-2014, 09:37 PM   #3
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My understanding has been that the ability to take such distributions without penalty varies from plan to plan.

I concede that that Pub 575 sounds more definitive.

I would point out the relevant sections of Pub 575 to your Benefits Center and ask why you have to wait until you are 59 1/2. Be pushy but not obnoxious. You may need to escalate the issue up to the management of the Benefits Center.

If they still say you can't take distributions penalty free then you are taking on some substantial tax risk. They will report it to the IRS as a taxable distribution subject to the 10% penalty. You will report it as penalty-free. The IRS will ask you about ti and the burden of proof will be on you to prove you are right. I'm not sure it is a risk I would want to take.
That would really really suck if they can prohibit distributions counter to what the IRS has defined in Pub 575....I wouldn't be able to FIRE!
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Old 04-14-2014, 09:43 PM   #4
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BBQ-Nut, I got the same bs from my wife's employer about her 401k. She is currently 53, and I am retiring this July, at age 56. Our plan has been that she retire at 55, and we believed she could access her 401k penalty-free that year. I don't know what to do at this point. If she rolls it into an IRA, then it has to stay untapped till she's 59 1/2 or else face the tax penalty. We'd like to be able to withdraw from both our 401k's (mine's actually TSP) evenly, but for now I don't see that happening.
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Old 04-14-2014, 09:48 PM   #5
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I just don't see how a private business entity can enforce the 10% penalty when that is the provence of the IRS and the individual tax payer. The penalty goes to the US gov, not megacorp.

Ok, so maybe I will have to put up with the burden of proof each and every year between 55 and 59 1/2 with the IRS.
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Old 04-14-2014, 10:11 PM   #6
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If your 401K Plan doesn't allow penalty free distributions prior to 59 1/2, then you could do a rollover to a traditional IRA and then a 72(t) to take equal distributions until your reach 59 1/2. The 72(t) rules look somewhat tricky and could have tax penalties if not done properly. If it were me, I would likely enlist the help of a CFP to file the correct forms for the 72(t). Search the forums - this plan has been discussed before.
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Old 04-14-2014, 10:24 PM   #7
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I just don't see how a private business entity can enforce the 10% penalty when that is the provence of the IRS and the individual tax payer. The penalty goes to the US gov, not megacorp.

Ok, so maybe I will have to put up with the burden of proof each and every year between 55 and 59 1/2 with the IRS.
But will the plan allow you to make partial early withdrawals?
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Old 04-14-2014, 10:26 PM   #8
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But will the plan allow you to make partial early withdrawals?
I'll have to dig up the Plan document and check.

Otherwise, I'm f'd and you won't see me here for a couple of years..
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Old 04-14-2014, 10:33 PM   #9
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I would pay the 10% penalty before I would work another 2 years. But I bet you will resolve it after pushing a little more.
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Old 04-14-2014, 11:08 PM   #10
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In addition to Pub 575, you can also refer them to the 1099-R Instructions

http://www.irs.gov/pub/irs-pdf/i1099r.pdf

specifically page 15:

Quote:
2—Early distribution, exception applies.

Use Code 2 only if the participant has not reached age 59 1/2 and you know the distribution is:...
  • A distribution from a qualified retirement plan after separation from service in or after the year the participant has reached age 55.
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Old 04-14-2014, 11:28 PM   #11
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Also you might want to check with the company that holds you 401k. Mine was with Principal. Even though it was not discussed in my company's plan, the people at Principal were familiar with the penalty free withdrawals.

I am getting one a month at present. Principal's website can be used to request the withdrawal, and it takes a little over a week after the request for the money to show up in my checking account via direct deposit. They do automatically withhold 25% income tax.
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Old 04-14-2014, 11:47 PM   #12
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It has always been a mystery to me why not all 401k plans are the same with respect to this issue. While I don't totally understand it, it looks as if it might be related to some very detailed rules that changed at one point to allow penalty-free early withdrawals for those separating from service after age 55 that plans were allowed, but not required, to adopt.

Se pages 7-8 of this link http://www.whitecase.com/files/Publi...fits_06_02.pdf

Quote:
The changes made by EGTRRA to the 401(k) plan distribution rules are effective for distributions made after December 31, 2001. In order to permit distributions following an employee’s severance from employment, a plan sponsor must amend the plan to substitute severance from employment for separation from service. However, a plan will not fail to comply with this distribution rule because it does not permit distributions in all situations in which an employee has a severance from employment. The changes made by EGTRRA are not mandatory. Therefore, a 401(k) plan is not required to be amended to provide for distributions upon a severance from employment. But if the plan is not amended to provide for such distributions, elective contributions to the plan may be distributed only in accordance with the terms of the plan
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Old 04-15-2014, 04:54 AM   #13
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i always thought that a plan had to allow for periodic payments at 55 in order to tap it if you left prior to 59-1/2. most do not.

if it didn't you can take it ,roll it over and 72t .

i am not 100% sure though with all the changes.
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Old 04-15-2014, 05:33 AM   #14
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What ticks me off is that it my companies summary plan description contains a provision for withdrawals after separation after age 55. However , our HR people can't seem to grasp this concept and continue to state one must wait to age 59 1/2. Maybe ER is getting to be such a rare situation it's not worth their time. I am also concerned a that when the time comes they won't have the competence to properly fill out the 1099 form
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Old 04-15-2014, 07:08 AM   #15
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HR staffs are usually wonderful at many things. But understanding the arcana of finance, including the details of one's 401k plan, is not generally among them.

Ask the average HR person what the expense ratio is for of one of your plan choices and you'll almost certainly get a blank look.

As pb4uski outlines, the IRS rules permit penalty-free withdrawals after age 55 if employment is terminated. But 401k plans differ significantly in their details. Some allow it that kind of qualified withdrawal. Some don't.

Your summary plan description should be close to definitive.
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Old 04-15-2014, 07:30 AM   #16
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I agree with mathjak,

Could you not do a partial rollover of your 401(k) and do 72t on that portion to tie you over for the next five years? Might not give you the same choices, but would help you to get out...

You would have to check with your plan provider to see if they allow a partial rollover.
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Old 04-15-2014, 08:18 AM   #17
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yep- 72t is the answer. The IRS code allows plan documents to include the age 55 provision but does not require it. I don't understand why all just don't... guess that would give an incentive for some well-prepared individuals to leave early??
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Old 04-15-2014, 08:43 AM   #18
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BBQ-Nut,

I would contact the Plan provider. I retired April 1st. Our Mega Corp HR plan administrator was clueless on the Rule of 55. Fidelity was the plan provider. I was required to roll-over all funds into an IRA from the 401K (due to the plan rules of no partial withdraws) but was able to withdraw funds prior to funding the IRA that will be used to suppliment my pension until 59 1/2. Just be aware that the taxes for withdrawn funds all hit the year you retire. The plan administrator is also required to withhold a minimum of 20% of the withdraw for taxes. Hope this helps.
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Old 04-15-2014, 09:05 AM   #19
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DH's last employer at 55 used Fidelity and the distribution information was in their online plan documents. His plan allowed early distributions and we called Fidelity to verify. His former HR department has never been involved since they are not the plan administrator - Fidelity is. We rolled over a couple of other retirement accounts to his last employer plan to make sure we would have enough in his account. So far everything has worked as advertised.
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Old 04-15-2014, 09:09 AM   #20
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My HR people were clueless as well. I obtained the Summary Plan Description and found poorly worded description of the process then contacted T. Rowe Price to locate the correct form and determine how I wanted to do the withdrawals. My Summary Plan Description required that I set up a withdrawal scheme based on a duration over which the entire amount will be withdrawn. I chose 180 months (15 years). The scheme would provide me 1/180th of balance the first month then 1/179th of the balance the next month and so forth. I could not change this scheme once set without triggering distribution of all remaining balance. I plan to roll the balance over at age 59 1/2 to an IRA and change withdrawal scheme to whatever I want it to be.
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