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Question for the wise: Rule of 55 on 401k
Old 07-23-2015, 08:21 AM   #1
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Question for the wise: Rule of 55 on 401k

As of yesterday megacorp provided me my 60 day RIF notice. I'm currently 55.5 YO. My question is this: For the sake of 401k early withdrawals w/o penalty, would a RIF be considered "early retirement" for the sake of this rule? Or, would i need to alter the RIF scenario and formally announce early retirement for IRS purposes or could i still withdrawal funds since it was the last company I worked for. Not sure how the IRS views this. Any guidance is appreciated.

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Old 07-23-2015, 08:33 AM   #2
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Mine reads "55 and terminated from service". Your SPD(summary plan description) has this information. You should be able to get a copy from benefits or HR. One thing to check is how you can make withdrawals, some plans are very flexible others not so much. Best wishes.
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Old 07-23-2015, 08:36 AM   #3
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Get it straight from the horse's mouth:Tax Topics - Topic 558 Additional Tax on Early Distributions from Retirement Plans Other Than IRAs

Quote:
The following additional exceptions [to the 10% penalty] apply only to distributions from a qualified retirement plan other than an IRA:

1. 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...
No mention of retirement, just "separation" from employment.
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Old 07-23-2015, 09:15 AM   #4
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Thanks to all for the responses
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Old 07-23-2015, 09:30 AM   #5
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My understanding is if you intend to use this rule, the balance has to remain in your employers plan. If you rollover to an IRA, I think you cannot take these "55" distributions anymore.
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Old 07-23-2015, 09:43 AM   #6
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And make sure that the plan was amended to allow for the Rule of 55 distributions.


Not all plans allow for this. And, you may find that you will have to ask/confirm with your plan representative 'experts' several times to get a final determination - as some reps don't even know what the Rule of 55 is or the IRS pub that defines it.
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Old 07-23-2015, 09:54 AM   #7
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yes you will need to read the spd and/or plan document - seems like a RIF is a bona fide separation of employment but double check with HR, they will be filling out the 1099
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Old 07-23-2015, 10:10 AM   #8
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Quote:
Originally Posted by BBQ-Nut View Post
And make sure that the plan was amended to allow for the Rule of 55 distributions.


Not all plans allow for this. And, you may find that you will have to ask/confirm with your plan representative 'experts' several times to get a final determination - as some reps don't even know what the Rule of 55 is or the IRS pub that defines it.
Is the plan modification really necessary?

If the plan allows for partial distributions, couldn't one just take a distribution, receive a 1099-R with code 1 and then fill out IRS Form 5329 to exclude the penalty?

Line 2 of 5329 has exemption '1' available defined as:
Quote:
"Qualified retirement plan distributions (does not apply to IRAs) you receive after separation from service when the separation from service occurs in or after the year you reach age 55 (age 50 for qualified public safety employees)."
Link to IRS 5329 Instructions

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Old 07-23-2015, 10:17 AM   #9
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It was my understanding when I was looking into this is that some plans...just...don't...do distributions before 59 1/2.
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Old 07-23-2015, 10:22 AM   #10
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Quote:
Originally Posted by BBQ-Nut View Post
It was my understanding when I was looking into this is that some plans...just...don't...do distributions before 59 1/2.
all do, just with the 10% hickey

some do after "retirement" which is defined in the plan, most are 55/5 or something.
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Old 07-23-2015, 10:42 AM   #11
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Not all plans are setup or required to offer partial distributions upon separation.

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Old 07-23-2015, 10:48 AM   #12
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Quote:
Originally Posted by gauss View Post
Not all are setup or required to offer partial distributions upon separation.

-gauss
Probably not. Every one I've seen in the last 30 or so years does although I'm not a 401k guy...
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Question for the wise: Rule of 55 on 401k
Old 07-23-2015, 11:18 AM   #13
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Question for the wise: Rule of 55 on 401k

I retired last year (57 yo). I read the info on the 401k (company intranet) and then called benefits to confirm. The rep I spoke to didn't know anything about the distribution available at 55 without 10% penalty. I referred him to the company HR website information. He confirmed with his manager that the website was accurate. Called again as my RE date came closer. They confirmed I could take partial distributions. This was factored into my personal financial plan since I was not 591/2 for tIRA access.
I called once more the week before retirement to confirm again the rules on 401k. All was confirmed good.
The day before I retired I received a call from HR/Benefits. I could still access 401k without 10% penalty, but it would have to be a full distribution. They apologized for the confusion.
So, I had to revise my plan and opted for 72t.
So, I suggest verify, then verify again (and maybe again).



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Old 07-23-2015, 11:28 AM   #14
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@Dog, Thanks for sharing your experience.

Did the written plan address whether partial distributions were available?
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Old 07-23-2015, 11:29 AM   #15
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Just looked at our spud and we have to wait to 59.5 to avoid the hickey. Partial distributions are always allowed after termination (hickey or no hickey).

Looks like I may have to live off of food stamps and relief checks between 55 and 59.5
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Old 07-23-2015, 11:39 AM   #16
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@Big_Hitter

A Suggestion,
Do a small partial distribution as soon as you are allowed (say $1,000)

When you get your 1099-R early the next year, fill out your taxes using IRS Form 5329 as I described above in post #8.

Best case, it all goes through and you don't have to pay the penalty.
Worse case, you will pay the penalty on the small distribution.

I don't want to see ER members on relief/foodstamps if it an be avoided ;-)



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Old 07-23-2015, 11:42 AM   #17
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I was being a little sarcastic - I think we have enough in non-401k assets to tide us over for a few years after I FIRE. When I get closer I'll disclose all the details for you guys to pick apart lol.


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Old 07-23-2015, 11:53 AM   #18
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Quote:
Originally Posted by gauss View Post
@Big_Hitter

A Suggestion,
Do a small partial distribution as soon as you are allowed (say $1,000)

When you get your 1099-R early the next year, fill out your taxes using IRS Form 5329 as I described above in post #8.

Best case, it all goes through and you don't have to pay the penalty.
Worse case, you will pay the penalty on the small distribution.

I don't want to see ER members on relief/foodstamps if it an be avoided ;-)



-gauss

The question should be, will the plan administrator automatically levy the 10% penalty fee/withholding, in addition to the mandatory 20% ordinary income withholding, and leave the OP with the task of somehow getting relief and reclaiming the penalty portion.
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Old 07-23-2015, 11:55 AM   #19
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No I think you are on your own regarding the hickey (i.e. you charge yourself on the 1040), at least that's the way it used to be IIRC. I'm pretty sure the hickey is reported as a code in a box on the 1099 . I'm guessing this is probably one of the biggest tax mistakes made annually and an unpleasant surprise to many that don't use turbotax or an accountant.


Should be in the 1099 instructions.
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Old 07-23-2015, 12:00 PM   #20
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I believe that it will be coded as 1099-R box 7 code 1 - "Early distribution, no known exception" and no 10% penalty should be withheld.

My test scenario described above should ferret out all the details for your particular case with low risk.
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