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Old 07-23-2015, 12:00 PM   #21
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It sounds like you need the 401k funds to live on, and (soon to be former) employer will not allow a series of withdrawals. If you take out a significant lump have you checked what it is going to do to your tax bracket? When I ran numbers back at my early retirement, it came out that to have spending money “on demand”, and leave the rest in a tax deferred account, we would be better off rolling the lump to an IRA, even if there was then a 10% penalty for pre 59 ½ withdrawals.
And there are of course exemptions to the 10% early IRA withdrawals, see the pub at:
http://www.irs.gov/pub/irs-pdf/p590b.pdf
Go to page 24 for exceptions to the penalty. An example would be using an IRA withdrawal to pay for medical insurance during a period of umemployment.

If you have the time, and are willing to go thru the legal loops, there is the option of creating your own business, setting up a “solo 401k”, and rolling megacorp 401k to your own 401k.
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Old 07-23-2015, 12:06 PM   #22
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well 72t avoids the hickey doesn't it?


just roll it over and start taking it out in accordance with one of the distribution tables
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Old 07-23-2015, 12:22 PM   #23
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My Megacorp SPD has the 55 exception:

"... The 10% additional tax will not apply to your after-tax contributions or in these situations: Your account is paid to you if you terminate employment with your Employer on or after reaching age 55, ..."
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Old 07-23-2015, 12:39 PM   #24
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My Megacorp SPD has the 55 exception:

"... The 10% additional tax will not apply to your after-tax contributions or in these situations: Your account is paid to you if you terminate employment with your Employer on or after reaching age 55, ..."
That doesn't specify full or partial withdrawal.
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Old 07-23-2015, 12:45 PM   #25
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It should not be an issue, but for your own piece of mind, email in a question to your HR/benefits department.
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Old 07-23-2015, 10:08 PM   #26
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Is the plan modification really necessary?....
Yes. As I recall, a change in the law back in the Reagan days allowed such penalty free distributions if plans made certain amendments to their plan documents. Many plans did, but some did not. Which is why we have the crazy result today where some plans can allow penalty free distributions to those terminating service in the year they turn 55 and others don't.
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Old 07-23-2015, 10:27 PM   #27
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Yes. As I recall, a change in the law back in the Reagan days allowed such penalty free distributions if plans made certain amendments to their plan documents. Many plans did, but some did not. Which is why we have the crazy result today where some plans can allow penalty free distributions to those terminating service in the year they turn 55 and others don't.
But don't you determine your own penalty when you file your tax return?

IRS Form 5329 seems very explicit about this.
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Old 07-23-2015, 10:33 PM   #28
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My wife's 401k plan unfortunately does not subscribe to the Rule of 55. She'll be leaving for good at age 56, but will have to wait till 59 1/2 to withdraw penalty free. We don't really have a need to fool with 72t, so we'll just wait.

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Old 07-24-2015, 04:14 AM   #29
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My wife's 401k plan unfortunately does not subscribe to the Rule of 55. She'll be leaving for good at age 56, but will have to wait till 59 1/2 to withdraw penalty free. We don't really have a need to fool with 72t, so we'll just wait.
I think that we may have misinformation being quoted in this thread.

If your DW's 401k plan allows distributions for separated employees before age 59 1/2 you should be good to go, IMHO.

401k plans, in general, are not required to allow distributions until the following occur:

From Publication 560:
Quote:
Benefit payment must begin when required. Your plan must provide that, unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the latest of the following periods.
  • The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan.
  • The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs.
  • The plan year in which the participant separates from service.
Provisions for earlier distributions than above would need to be defined in the plan documents.

Other than that, the requirements for the rule of 55 are shown below.

Please see Notice 87-13, CB 432 Q&A-20 for this:
Quote:
Q-20: What additional tax on early distributions from qualified retirement plans applies under section 72(t) (as added by TRA'86)?
A-20: Section 72(t) (as added by TRA'86) applies an additional tax equal to 10 percent of the portion of any "early distribution" from a qualified retirement plan (as defined in section 4974(c) of the Code) that is includible in the taxpayer's gross income. A distribution (including deemed distributions under section 72(p)) is treated as an "early distribution" unless it is described in section 72(t)(2)(A) (taking into account section 72(t)(3) & (4)). A distribution to an employee from a qualified plan will be treated as within section 72(t)(2)(A)(v) if (i) it is made after the employee has separated from service for the employer maintaining the plan and (ii) such separation from service occurred during or after the calendar year in which the employee attained age 55.
A distribution that is an "early distribution" will not be subject to the additional tax to the extent provided under section 72(t)(2)(B) (relating to deductible medical expenses under section 213), section 72(t)(2)(C) (relating to certain distributions from employee stock ownership plans), or section 72(t)(2)(D) (relating to distributions pursuant to qualified domestic relations orders). The determination of whether the additional tax under section 72(t) applies to a distribution is to be made without regard to whether the distribution is treated as a mandatory distribution for purposes of section 411(a)(11) or section 417(e).
The payor (or, if applicable, plan administrator) is not liable under section 3405 to withhold any amount on account of the additional income tax imposed under section 72(t). However, the taxpayer may have estimated tax liability with respect to such additional income tax.
Although a 401k plan document may make reference to the rule of 55, this is not a requirement for you to take penalty-free distributions before age 59 1/2. The plan just needs to allow for distributions before age 59 1/2.

ESOP's, which were popular back in the Reagan era on the other hand, may have different requirements for penalty free distributions prior to age 59 1/2 [see Q21 in the above notice]. Perhaps this is the source of the confusion on this.

Please note I am not a professional in this area but rather an enthusiast. If someone has a reference that plan modifications referencing rule of 55 are indeed a requirement to get penalty-free access to 401ks post-separation, prior to age 59 1/2 please bring it to this discussion.

-gauss
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Old 07-24-2015, 08:32 AM   #30
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But don't you determine your own penalty when you file your tax return?

IRS Form 5329 seems very explicit about this.
You do determine the penalty, but the penalty is dependent on how the 1099 is coded. If it is coded as penalty applies and you don't include the penalty on your tax return then you have the burden of proving that you are not subject to the penalty when they challenge you on it. My understanding is that if your plan has not made the requisite changes that allow penalty free distributions to participants who terminate in the year they turn 55 that you will lose and then have to pay the 10% early distribution penalty plus penalties and interest for filing an inaccurate return.

Generally speaking, it isn't a risk that many taxpayers want to take on, but if you have some free time on your hands, by all means go for it.

I would be the first to agree that it is stupid and unfair that some plans seem to allow penalty-free distributions from age 55 and others not until 59 1/2. It doesn't make sense. I'm glad I was never in a position of needing 401k funds between 55 and 59 1/2 and having a plan that did not allow penalty free distributions.
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Old 07-24-2015, 09:45 AM   #31
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But don't you determine your own penalty when you file your tax return?

IRS Form 5329 seems very explicit about this.
yep
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Old 07-24-2015, 10:15 AM   #32
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Gauss, unfortunately I never saw the fine print for the flexibility of the distribution. In hindsight I should have asked them for it to verify on my own. The 72t is working out well so far.


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Old 07-24-2015, 10:40 AM   #33
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You do determine the penalty, but the penalty is dependent on how the 1099 is coded. If it is coded as penalty applies and you don't include the penalty on your tax return then you have the burden of proving that you are not subject to the penalty when they challenge you on it. My understanding is that if your plan has not made the requisite changes that allow penalty free distributions to participants who terminate in the year they turn 55 that you will lose and then have to pay the 10% early distribution penalty plus penalties and interest for filing an inaccurate return.
Good - this discussion is bearing fruit.

I would recommend to people who separate during or after the year they turn 55 receive and retain a letter from their employer documenting their last day of work, or the fact that they separated effective so and so date.

Having this documentation in hand along with proof of birthday would satisfy my reading of the requirements to receive the penalty free distributions if someone is ever audited on this and the employer has not provided code 2 (early distribution - exception applies) in box 7.

I don't think they would be accessed fines for filling out an inaccurate return in that I don't see anywhere in the IRS instructions/publications about a requirement to have the age 55 rule explicitly enumerated in the plan -- it is the law regardless.

I believe that plans who include the rule are basically doing it for convenience of administration. My father's condo association is doing this right now with their bylaws - explicitly including new language from the state laws that have changed. When I questioned the need for this (and the associated legal fees), the answer finally came out that having one document to administrate the association is more convenient then having to also read current state law also, but the law would apply equally in either case.

-gauss
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Old 07-24-2015, 11:15 AM   #34
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Good - this discussion is bearing fruit.

I would recommend to people who separate during or after the year they turn 55 receive and retain a letter from their employer documenting their last day of work, or the fact that they separated effective so and so date.

Having this documentation in hand along with proof of birthday would satisfy my reading of the requirements to receive the penalty free distributions if someone is ever audited on this and the employer has not provided code 2 (early distribution - exception applies) in box 7.

I don't think they would be accessed fines for filling out an inaccurate return in that I don't see anywhere in the IRS instructions/publications about a requirement to have the age 55 rule explicitly enumerated in the plan -- it is the law regardless.

I believe that plans who include the rule are basically doing it for convenience of administration. My father's condo association is doing this right now with their bylaws - explicitly including new language from the state laws that have changed. When I questioned the need for this (and the associated legal fees), the answer finally came out that having one document to administrate the association is more convenient then having to also read current state law also, but the law would apply equally in either case.

-gauss
I don't think the issue is the 'legality' that the tax code permits this, but an administrative one for a given coroporation's "Plan" in that the Plan may not be set up to allow for distributions before the usual 59 1/2.

It could be that some plans will only give you the choice of rolling the whole balance over to an IRA, but not allow partial distributions (excluding the exceptions for house/medical/etc emergencies).

You can quote the tax code til your blue in the face, but if the plan administrator says they are not set up to do distributions before 59 1/2, then the only option may be to roll over the whole 401k balance to an IRA and do the 72t approach.
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Old 07-24-2015, 03:35 PM   #35
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I don't think the issue is the 'legality' that the tax code permits this, but an administrative one for a given coroporation's "Plan" in that the Plan may not be set up to allow for distributions before the usual 59 1/2.

It could be that some plans will only give you the choice of rolling the whole balance over to an IRA, but not allow partial distributions (excluding the exceptions for house/medical/etc emergencies).
+1 Totally agree.
The plan must allow for withdrawals in the plan document at the age you need them. If this is not provided then you are stuck.

The issue that I saw here was that folks thought they need the plan to acknowledge "penalty-free" withdrawals either explicitly in the plan documents or via conversations with CSRs and lacking this a 10% penalty would be due which I believe is not the case.

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Old 07-24-2015, 08:46 PM   #36
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When I called my 401K folks, I got run-arounds too, but until I requested to talk to the retirement group (I said I wanted to start taking distributions). I got accurate information from them that matched the plan documents. They told me the details (like I will have to manually take distributions instead of setting up an automatic one..) and one guy even talked to me about options for 72t (Move only a part of it to an IRA and do 72t if I want automatic distributions.)
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