Using Age 55 Rule to get from 55 to 59.5

[JackJester]

DW and I plan to RE in 4 years on Jan 1 (of the year I turn 55). So now we need to get from 55 to 59.5.

We will need an estimated $75K to live on per year (I calculate we can stay right below the 15% tax line and be comfortable).

We will have $1.2mil in 401K and $75K in an after tax brokerage account. I’d like to move that 401K to an IRA with the brokerage to have better investment choices. ..but…

I need $ to cover 5.5 years before tapping 401K penalty free, so that’s approx $412500.

I assume (correct me if I am wrong) it is best to tap the $75K after tax to live on during those 5.5 years, so that leaves $337500 to cover somehow.

My choices are Age 55 Rule or SEPP72t or maybe a combination. I can’t do Roth conversions since I won’t be able to touch that $ for 5 years anyway. I don’t want to do 72t unless I have to due to the complexity and possibly screwing it up and paying a big penalty.

With all that said, is my best choice to leave $337500 in my company 401K when I retire and then rollover the rest of the 401K to the IRA? And then just use the 55 Rule to withdrawal from the company 401K each year until I get to 59.5?


Thank You

 

[gcgang]

Unless your 401k really sucks, I'd leave enough in there to give you ample cushion above your $337,500.

Why would you even consider 72t if you meet the age 55 401k no penalty requirements?

 

[mathjak107]

DW and I plan to RE in 4 years on Jan 1 (of the year I turn 55). So now we need to get from 55 to 59.5.

We will need an estimated $75K to live on per year (I calculate we can stay right below the 15% tax line and be comfortable).

We will have $1.2mil in 401K and $75K in an after tax brokerage account. I’d like to move that 401K to an IRA with the brokerage to have better investment choices. ..but…

I need $ to cover 5.5 years before tapping 401K penalty free, so that’s approx $412500.

I assume (correct me if I am wrong) it is best to tap the $75K after tax to live on during those 5.5 years, so that leaves $337500 to cover somehow.

My choices are Age 55 Rule or SEPP72t or maybe a combination. I can’t do Roth conversions since I won’t be able to touch that $ for 5 years anyway. I don’t want to do 72t unless I have to due to the complexity and possibly screwing it up and paying a big penalty.

With all that said, is my best choice to leave $337500 in my company 401K when I retire and then rollover the rest of the 401K to the IRA? And then just use the 55 Rule to withdrawal from the company 401K each year until I get to 59.5?


Thank You

the first question is does your plan allow for periodic distributions and allow more than one withdrawal ? most do not .

less than 1/2 of all 401k's allow periodic distributions . if not they only let you roll or take 1 draw out -period -not yearly .

the problem is that unless the plan allows for periodic distribution there really is no benefit to the age 55 rule except if you would be paying taxes on 100% of it at once .

any rollover now is subject to having to be a 72t once it hits your ira as a rollover

 

[Al18]

I would check your 401K Summary Plan Description (SPD) to determine if your 401K allows withdrawals in the year your turn 55.

72t withdrawals are more limited and based on the Federal Mid-Term rate, which is currently 2.40%. If you had $1,000,000 in your IRA, the maximum you are allowed to withdraw is calculated to be $47,580 per year if you begin withdrawals at 55.

 

[mathjak107]

many think that automatically they get to draw out what they want ,either under the age 55 rule if the plan allows periodic payments or if they 72t but that is not the case .

 

[DrRoy]

I am considering pre 59.5 withdrawals as well, especially if shifting from reg IRA to Roth is blocked by the new tax bill.

 

[kaudrey]

I would suggest saving more in the taxable account over the next four years instead of putting more in the 401K over that time. My plan has always been to build up enough in taxable to carry me in those early retirement years. (I'm also retiring in about 4 years).

 

[MRG]

Good point's about availability of 401k rule of 55 support.

In reference to partial roll overs, I'm not sure how many plans offer that.

We did use 55 and over from 56-59.5 and it worked well for us. A note on your company 401k. I kept mine in an active fund that it was in for 33 years. The last year the find manager went nutty and overweighted Vertex before it crashed!

 

[Sunset]

OP - Unless your 401K is very friendly for your situation, it appears to be a pretty big stretch.

I think you should immediately start saving after tax, and cut the 401K contribution to the minimum needed to get matching. Your after tax savings is really low, and you need more.

You could also over the next few years find a free (no cost if not used) HELOC assuming you own your own home, as you could tap that when retired to cover some of the needed money cost. Paying a low interest rate is better than paying a 10% penalty. Then once you retire, repay it from withdrawals from the IRA, here the issue is you will be pushed into higher tax bracket to pay it off in a few years.

You may need to work longer, an extra year or two adds more after tax savings, and means less years to cover.

If both of you are not working, the big question is why ?
Even a min wage job would add 18K to the pot per year and in 4 years that is $72K or 1 year of retirement.

 

[JackJester]

Thanks. I definitely need to increase the size my after tax account and will start working hard on it for the next 4 years. Hind-sight is 20-20; I wish I would have begun the taxable account in my 30s vs late 40s. It's not clear whether I can do "periodic" rollovers to an IRA; I need to talk to a person. Here's what the SPD says:

Rollovers to an IRA, a Roth IRA, or Another Qualified Plan
You may elect to have all or a portion of certain distributions and withdrawals rolled over directly to an IRA, a Roth
IRA, or another retirement plan. Direct rollovers to other plans are subject to acceptance by the administrator of the other employer’s plan. It is especially important to receive confirmation from the other plan’s or IRA’s administrator
that the plan or IRA may accept the rollover if you want to roll over Company Stock, Roth, or Aftertax Contributions. You
may make your rollover request through the My Retirement Income website or by calling the Company Retirement
Service Center.
Mandatory Federal income tax withholding (at a rate of 20 percent) and applicable state tax withholding will be
applied to the taxable portion of most distributions that are not rolled directly to an IRA or another qualified plan
(excluding any hardship distributions, required minimum distributions, and installment payments made over a period
of ten years or more). In addition, a 10 percent early withdrawal tax may apply if you are under age 59½ at the time of
your distribution. An exception to the 10 percent early withdrawal tax may apply if you terminate employment during
or after the year you reach age 55.

 

[bobandsherry]

I retired 2 years ago at 54. My after-tax vs. pre-taxable (401K/Cash pension balance) was about 30/70. I was much like you with the blindspot that 401K was the investment of choice while working. It is, but to a reasonable point and I started to rebalance my after/pre tax holdings as I approached retirement.

You didn't mention if you have health insurance or would need to get via ACA (or whatever it may be called). And who knows what health insurance coverage options will be in 4 years, but having after-tax investments has let me mange my MAGI so that I get subsidy and CSR. The health care benefit has more than covered any tax loss I would have had by limiting my 401K investments. If I was covering my living expenses from 401K withdrawals I'd be paying tax plus about $15k additional in medical premiums and costs each year.

With a bit of hindsight on how I would have done things differently.... check if your 401K has ability to do a "in plan" Roth conversion. If so, then convert some of the $$ each year (depending on your marginal tax rate). Or alternatively, change your 401K contributions to go into 401K Roth. That money grows tax free and doesn't count towards MAGI. To be qualified distribution you must have contributed for at least 5 years and be 59.5+ years old.

 

[pb4uski]

Your first step is to talk with your 401k administrator to see what restrictions exist on rule-of-55 distributions after you have left service.

I'll probably get flamed for this but if you own a home and intend to stay there through 59[-]5[/-] 1/2, you might do a cash out refinancing while you are working to bolster your taxable portfolio.... that, along with the $75k and ~$57k/year 72t/SEPP distributions from your $1.2 million 401k rolled over into a tIRA should be sufficient to carry you from 55 to 59 1/2 and pay both the $75k a year that you need and the loan payments. One you reach 59 1/2 you could use a good portion of your taxable accounts to pay down or pay off the remaining mortgage balance.

The tIRA/72t/SEPP sidesteps any restrictions on 401k distributions.

Alternatively, do you have other signifcant assets that you could use as collateral for a loan to bolster your taxable accounts?

ETA: changed typo of 55 1/2 to 59 1/2.

 

[Backpacker]

Thanks for bringing this up. My intention has been to fully retire at 55 (downshifted to PT 1.5 years ago). This thread prompted me to dig into our 401k plan summary, and confirmed that it's acceptable in my plan. We also have $250k in 457b plans. Budget is about 50k/ year in retirement, so may not have to tap the 401k, but good to know that it's an option.

 

[MRG]

Thanks for bringing this up. My intention has been to fully retire at 55 (downshifted to PT 1.5 years ago). This thread prompted me to dig into our 401k plan summary, and confirmed that it's acceptable in my plan. We also have $250k in 457b plans. Budget is about 50k/ year in retirement, so may not have to tap the 401k, but good to know that it's an option.

In the spirit of your comment. Two things I wish I had done or looked at differently.

1. Get approved for a HELOC while still w*rking.
2. Looked at company stock and an NUA. While I knew about an NUA I underestimated it's power. Woulda, coulda, shoulda an easy million after tax.

 

[Backpacker]

We are super debt averse, but I am thinking a no cost HELOC is a good idea to have in place before retirement. DW has a very overdeveloped security gland, she may not be convinced.

Edit to add - no company stock do NUA isn't on the table.

 

[jimbee]

I would recommend you seriously consider saving the money needed from 55 to 59.5 outside of the 401k. My company 401k had fairly flexible 'rule of 55' withdrawals until 16 months before my retirement date. They then changed the withdrawal rule to all or nothing. I had to scramble a bit to compensate for this change.

 

[bobandsherry]

I'll probably get flamed for this but if you own a home and intend to stay there through 55 1/2, you might do a cash out refinancing while you are working to bolster your taxable portfolio....

I agree with your line of thinking. It's easier now to get access to the funds while still working. Rates are also still low.

When it came time for my retirement we were relocating. I bought the new house as a "second home" while I was still working, mortgage rate is only 3%. While I had funds to pay cash it would have generated a lot of capital gains and taxed at a much higher rate (15%) than I enjoy in retirement (0%!). The funds kept in the market for last 2 years has returned MUCH more than the 3% I'm paying.

And one other thing I considered, if I have an emergency the funds are very liquid vs. if I had paid cash for the house.

 

[purplesky]

DW and I plan to RE in 4 years on Jan 1 (of the year I turn 55). So now we need to get from 55 to 59.5.

We will need an estimated $75K to live on per year (I calculate we can stay right below the 15% tax line and be comfortable).

We will have $1.2mil in 401K and $75K in an after tax brokerage account. I’d like to move that 401K to an IRA with the brokerage to have better investment choices. ..but…

I need $ to cover 5.5 years before tapping 401K penalty free, so that’s approx $412500.

I assume (correct me if I am wrong) it is best to tap the $75K after tax to live on during those 5.5 years, so that leaves $337500 to cover somehow.

My choices are Age 55 Rule or SEPP72t or maybe a combination. I can’t do Roth conversions since I won’t be able to touch that $ for 5 years anyway. I don’t want to do 72t unless I have to due to the complexity and possibly screwing it up and paying a big penalty.

With all that said, is my best choice to leave $337500 in my company 401K when I retire and then rollover the rest of the 401K to the IRA? And then just use the 55 Rule to withdrawal from the company 401K each year until I get to 59.5?


Thank You

So will you guys be eligible for pensions at some point? Just wondering how you will produce $75k per year in retirement long term if you tap your 401k so early.

I guess factoring in SS will put a good amount to the $75k per year goal.

 

[JackJester]

Great feedback, here’s some more detail:

I am lucky to have a very nice Early Retiree Medical coverage, so that is covered. It has since been eliminated for newer hires to the company.

I talked to a plan rep today and I can rollover 401K portions to an IRA whenever I want. Or, I can withdrawal it whenever, but, it's that nasty 20% mandatory tax that is the killer if I invoke the 55 rule and withdrawn from the 401K. At least there's no 10% early withdrawal penalty.

I already have a HELOC that I’m paying off now. I will have 0 debt (including no mortgage) when I hit 55. I expect there will be the car payment at some time, but everyone has to factor that in. I don’t want to have another HELOC afterwards, but maybe I should to pay my bridge to 59 1/2, and pay it off later via 401K withdrawals. I need to think this through. “Debt” is a 4 letter word to me.

I’m in the 28% tax bracket now, but expect to be barely on the left side of the 15% bracket when both my wife and I are no longer working (ideally at the same time).

Yes, I have a Pension that is available the year I turn 55 (again lucky, new hires don’t get it). I’m thinking I’ll take the lump sum (~280K after taxes) vs an annual payment of $10K after taxes. The company is a mega and not likely to go under, but the Pension could always be eliminated.

I’m thinking now that I may need to do a small 72t to avoid that 20% tax (?). There’s a lot to consider when you just want to RE and you're not filthy rich.

Thank you all. FIRE Calc reports success with my inputs, but there are the subtle details on how to bridge the gap to 59 1/2 that I don't think it handles. In the mean time, I'm going to do all I can in the next 4 years to build up that after tax account as my bridge.
Jack

 

[jazz4cash]

I agree with suggestion to focus on taxable savings. You have plenty of time. Don't get hung up on the mandatory withholding. If you withdraw in Dec you could file and have the excess refunded by Feb.

 

[Al18]

I believe the 20% Federal Tax withholding for all 401K withdrawals is standard practice, and applies no matter what your age is. Note this is only withholding. If you'll be in the 15% tax bracket during retirement, there's a good chance you'll get half of what was withheld, refunded when you file your tax return.

 

[AndyS]

I do what are essentially 72t (life expectancy) withdrawals from my TSP. My understanding is I can change that option in the year I turn 59.5

 

[43210]

This thread has alerted me that I need to carefully look at the rules for my 457 and 403. But if (as I expect) the rules are favorable, I see no need for a large taxable account and I see significant tax advantages in taking full advantage of tax-advantaged space.

 

[Sunset]

OP - do not worry about the 20% tax withheld, as you will get back the overpayment when you file your taxes. No matter what you are going to pay some taxes.

Jumping through the dangerous 72t to try to avoid the taxes would be a poor reason to do the 72t considering the danger if you make a simple $10 mistake during the 5 year minimum dictated by the rules.

It seems like your 401K will allow you to make yearly withdrawals.

For the 20% tax, you can think of it as taking out some extra for the next year, every 2 years.
First year you take out $75K + 19K (for 20% tax)
The second year you will need to take out less as you will have gotten a refund of at least 5K - maybe 10K from overpayment of taxes.
Then the 3rd year you do the $75K + 19K again.
4th year take out less as you will be getting the refund of 5->10K

 

[pb4uski]

The 20% withholding tax is just a timing difference... a nuisance but nothing to fret about... if there was no withholding then you would need to make estimated payments so within 12 months or less what you pay in tax will be the same whether there was withholding or not.