question on early retirement and 401k

[Sgrant1158]

Hi

Planning on retiring at 56 (in 2 years) and wanted to know about 401k withdrawals.

Can I take out at 56?
how much can I take out?
can I take out monthly?
do I have to take out the same amount every time?

Any help would be great

thanks everyone

Steven

 

[daylatedollarshort]

Legally, you can make penalty free withdrawals from the employer 401K for the job you are working at in the year you turn 55 or later after your employment terminates. How much (if not 100%) and when depends on the rules of your particular plan.

 

[heeyy_joe]

Great that you are planning ahead. daylate's answer is spot on, make an appointment with your HR benefits rep and take these questions to them. Find out about other early retirement stuff too - medical, pension, etc.

 

[rodi]

Clarification on this.

It depends on the 401k plan. My current employer does not allow penalty withdrawals at age 55. They require you wait till 59.5. I'm in the midst of a corporate takeover (closes tomorrow) - and the new plan also requires waiting till 59.5.

Trust me - I've totally scoured the plan documents.

The 55 withdrawal is not available in all 401k plans. (Wish it was.)

 

[timo2]

Clarification on this.

It depends on the 401k plan. My current employer does not allow penalty withdrawals at age 55. They require you wait till 59.5. I'm in the midst of a corporate takeover (closes tomorrow) - and the new plan also requires waiting till 59.5.

Trust me - I've totally scoured the plan documents.

The 55 withdrawal is not available in all 401k plans. (Wish it was.)

AFAIK the 55 withdrawal option is available if you do the following "Distributions made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply." Tax Topics - Topic 558 Additional Tax on Early Distributions from Retirement Plans, Other Than IRAs

 

[martyb]

Clarification on this.

It depends on the 401k plan. My current employer does not allow penalty withdrawals at age 55. They require you wait till 59.5. I'm in the midst of a corporate takeover (closes tomorrow) - and the new plan also requires waiting till 59.5.

Trust me - I've totally scoured the plan documents.

The 55 withdrawal is not available in all 401k plans. (Wish it was.)

I don't believe it's up to the employer. It's an IRS rule. My wife's HR person does not believe it either, but in a couple of years when my wife retires at 55, I'm expecting to be able to prove she's (HR lady) a little out of touch with the way things actually work. She was pretty arrogant about the whole thing when we met with her recently. I'm not sure who actually does the witholding of the penalty, but if it's the employer, I would imagine they have to turn it over to the IRS, and then I would expect you would be able to get it back when you do your taxes.

 

[omni550]

The Fairmark forum has some posts on 72(t) that might be useful: Fairmark Forum :: Retirement Savings and Benefits :: 72t questions....

 

[rodi]

I'm sorry - I didn't realize you were talking about 72(t)s. I've seen mention on this board of 401k plans that allow participants to start withdrawing at 55 (vs 59.5) without having to do the 72(t). It's been an argument sited for not rolling over your 401(k) when you separate.

My apologies.

 

[Packman]

I recently went through the same question for my DW's 401k. She will retire after 55, but before 59.5. A FIDO rep told me it was up to the employer in how their plan documents were written. My DW is the HR manager, but didn't know anything about this. She brought home hundreds of pages of plan documents, but I could not find anything about this particular issue. I looked at Pub 590, and it said you could WD funds after 55. It didn't say anything about specific employer plan documents.

It seems hard for me to believe that the IRS can enforce penalties when every employer can have different rules. Or is it totally up to the employer to assess the potential penalties at time of withdrawal? Extremely confusing! (The 72t regs are not of help to her as her withdrawals under that program would be far too small).

 

[daylatedollarshort]

I'm sorry - I didn't realize you were talking about 72(t)s. I've seen mention on this board of 401k plans that allow participants to start withdrawing at 55 (vs 59.5) without having to do the 72(t). It's been an argument sited for not rolling over your 401(k) when you separate.

My apologies.

I believe you can take a 401K distribution without the 72t and without the 10% penalty if the distribution was -

"Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55."

http://www.irs.gov/Retirement-Plans...---Plan-Sponsors---General-Distribution-Rules


What the 401k sponsor doesn't have to do is let you take out 2K a month for 20 years or whatever, but some plans will allow periodic payments like this.

 

[daylatedollarshort]

I recently went through the same question for my DW's 401k. She will retire after 55, but before 59.5. A FIDO rep told me it was up to the employer in how their plan documents were written. My DW is the HR manager, but didn't know anything about this. She brought home hundreds of pages of plan documents, but I could not find anything about this particular issue. I looked at Pub 590, and it said you could WD funds after 55. It didn't say anything about specific employer plan documents.

It seems hard for me to believe that the IRS can enforce penalties when every employer can have different rules. Or is it totally up to the employer to assess the potential penalties at time of withdrawal? Extremely confusing! (The 72t regs are not of help to her as her withdrawals under that program would be far too small).

The FIDO rep should know what is in each plan rules if the 401K plan is administered by them. I would call back and ask for a retirement plan specialist. Fidelity is the entity who would administer the monthly payments, if allowed, so they have to know what's in the rules. At least this is how we were told it would work by the FIDO folks, anyway.

For our plans with FIDO the withdrawal rules for each plan are all online at the Netbenefits site in the plan documents. We double checked what we read with a retirement plan rep to make sure we understood the documents correctly.

 

[Packman]

The FIDO rep should know what is in each plan rules if the 401K plan is administered by them. I would call back and ask for a retirement plan specialist. Fidelity is the entity who would administer the monthly payments, if allowed, so they have to know what's in the rules. At least this is how we were told it would work by the FIDO folks, anyway.

For our plans with FIDO the withdrawal rules for each plan are all online at the Netbenefits site in the plan documents. We double checked what we read with a retirement plan rep to make sure we understood the documents correctly.

Thanks for the info. It has been a frustrating experience as I did talk to a FIDO retirement plan specialist, one who sounded knowledgable. He directed me to the employer, who did not know. So I called back and the FIDO rep told me to have the employer call FIDO (they would not answer questions from me as the plan is for my wife). If I have my DW call, well, let's just say that won't work.

I'll see if the plan documents are online. Then if I have questions, they may talk with me. The saga continues! Thanks again.

 

[LOL!]

And some folks don't want to talk to HR anyways because they want to keep their retirement plans relatively secret from their employer.

 

[perrytime]

As a side note, and just in case anyone knows different, I was hoping on using the after 55 get $ from 401k plan, but as self employed person with solo 401k, Fidelilty wasn't ready to say I could in fact access my $ without penalty. I thought voluntary vs involuntary job termination might be a factor, any comments?

 

[Packman]

I was able to review some of the plan documents online, of my DW's Fidelity 401k, and I did find the following:

If I don’t do a rollover, will I have to pay the 10% additional income tax on early distributions?​

This tax is in addition to the regular income tax on the payment not rolled over.
The 10% additional income tax does not apply to the following payments from the Plan:​

· Payments made after you separate from service if you will be at least age 55 in the year of the separation


So thanks, "a day late". It would appear we can withdraw penalty free.

 

[rbmrtn]

I think the question is answered in the IRS document. It says distributions can not be made until 59 1/2.

The part about 55 is a specific case where the 10% early withdrawal penalty does not apply.

Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55.

It's up to the plan if they allow the withdraws for this at all, if they do then the 10% penalty is waived.

 

[Brett_Cameron]

I think the question is answered in the IRS document. It says distributions can not be made until 59 1/2.

The part about 55 is a specific case where the 10% early withdrawal penalty does not apply.

Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55.

It's up to the plan if they allow the withdraws for this at all, if they do then the 10% penalty is waived.

Exactly right. It took a lot of digging to find the forms used by my Megacorp that allow the systematic withdrawals. My Megacorp plan required a setup of systematic withdrawals. I could specify a duration for the systematic withdrawals. For example if I specified a 15 year (180 months) duration, the first withdrawal would be 1/180th of the balance, next month would be 1/179th and so on. The plan stated that if this was changed in any way after it started then the entire balance would be immediately distributed via rollover to an IRA or lump sum to the retiree. There may be another obscure requirement to maintain such a systematic withdrawal for at least 5 years (similar to the IRA 5 year SEPP rules). I have not figured that part out.

 

[daylatedollarshort]

I think the question is answered in the IRS document. It says distributions can not be made until 59 1/2.

The part about 55 is a specific case where the 10% early withdrawal penalty does not apply.

Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55.

It's up to the plan if they allow the withdraws for this at all, if they do then the 10% penalty is waived.

I think if you are separated from service you have a right to your own 401K money no matter what your age. The question is if you take a distribution instead of doing a rollover do you have to pay a 10% penalty.

The plan may or may not allow periodic withdrawals, but I don't think they can legally prevent you from taking a 100% distribution, rollover or not.

 

[rbmrtn]

I think if you are separated from service you have a right to your own 401K money no matter what your age. The question is if you take a distribution instead of doing a rollover do you have to pay a 10% penalty.

Even if you are not an employee, if you maintain the 401k you are subject to the rules of the plan. You can get your money but how you take may result in the 10% penalty.

 

[daylatedollarshort]

Even if you are not an employee, if you maintain the 401k you are subject to the rules of the plan. You can get your money but how you take may result in the 10% penalty.

The 10% penalty is the IRS rule, not the 401K plan's rule. The penalty money goes to the IRS, not the plan. The IRS does not charge a penalty if the distributions are "Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55."

If the plan sponsor wants to withhold 10% even if it wasn't owed, you would just get the money back as over withholding when you did your income taxes for the year. If you wanted to do a rollover and the plan sponsor withheld 10% you would have to make up the difference out of your own pocket or owe taxes (but not a penalty) on the 10% that didn't get rolled over in the 60 day window, since then it would be considered a distribution.

 

[Katsmeow]

Well, some plans have rules about how you can withdraw.

For example, in my plan, you are allowed to withdraw at 55 if you leave if you had at least 10 years of service.

That is basically that, yes, I could withdraw from the plan at or after 55 but before 59 1/2 (since I have more than 10 years of service).

That is a completely different question from how I can withdraw. Regardless of my age, even if I was 65 for example, I can withdraw in only 2 ways. I can withdraw all the money in a lump sum. Or, I can withdraw in substantially equal amounts over a period of time, such as annual or more frequent installments. I could do the substantially equal amounts and then after a while decide to fully withdraw the remaining balance.

However, I could not, for example, decide to withdraw $30,000 a year for 3 years and then stop withdrawing. Or, withdraw $50,000 this year and $20,000 next year and then $40,000 the following year.

(Note that sometimes in-service withdrawals of a lump sum specified by the employee can also sometimes be made depending upon age and the terms of the plan.)