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What I Learned Today - 401K Penalties
Old 04-10-2013, 08:40 AM   #1
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What I Learned Today - 401K Penalties

Sharing a lesson learned with peers. I just got off the phone with my HR retirement counselor and learned that there are advantages to keeping my 401K separate rather than rolling it into the IRA.

She said that because I am taking retirement at >55 I can take penalty free withdrawals from the 401K (still taxed) based on my situation. If I moved it to the IRA I would be limited to IRA options for penalty free withdrawals (72t). The only downside is limited savings plan options which are not to bad.

That is a helpful option for me.
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Old 04-10-2013, 09:01 AM   #2
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Yes, the 55+ penalty free withdrawal option from 401k accounts is a nice option - providing your employer allows it as yours does. Here's one of several threads on the subject:

Retire at 55 and avoid 10% penalty?
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Old 04-10-2013, 09:31 AM   #3
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Would it be possible to live off other funds and not touch the IRA until 59 1/2? Or take partial distribution under 'annuity' exception-
Publication 590 (2012), Individual Retirement Arrangements (IRAs)

FWIW- I'm also going through the 401k vs IRA issue. Got an old 401k that's gonna be closing up. Decided to roll funds over to IRA (vs current employer 401k) due to lower fees & more investment options.
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Old 04-10-2013, 09:59 AM   #4
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You could also ask to have only part of the 401k rolled into the IRA, and leave funds in the 401k for access iff you need them between 55 and 59 +1/2.

I retired at 57 and that's what I did thru Fidelity.
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Old 04-10-2013, 11:14 AM   #5
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Originally Posted by Lcountz View Post
You could also ask to have only part of the 401k rolled into the IRA, and leave funds in the 401k for access iff you need them between 55 and 59 +1/2.

I retired at 57 and that's what I did thru Fidelity.
+1
The "retirement counselor" should have offered this information too.
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Old 04-10-2013, 11:21 AM   #6
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Change custody of the 401k to a Vanguard account. Still a 401k, low cost, versatile options...

Contact VG - they can advise how.
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Old 04-10-2013, 11:57 AM   #7
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We rolled some IRAs into a company sponsored 401K DH after he turned 55 so we could take the money out without penalty prior to 59.5.
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Old 04-10-2013, 11:59 AM   #8
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Originally Posted by Tekward View Post
The only downside is limited savings plan options which are not to bad. .
Thanks for sharing and I did know this, but don't underestimate this limitation.
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Old 04-10-2013, 12:09 PM   #9
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This is one reason why I'm not inclined to roll over my last Megacorp's 401K into an IRA. I'd like to have full access as needed in 2020 (the year I turn 55) rather than 2025 (the year I turn 59 1/2). There's a chance that I'll be taking SEPP on my IRA (rollover from first Megacorp 401K) before then anyway.

I think to pull this off I'd have to get another j*b, roll this 401K into my future employer's 401K and then pull the plug between 2020 and 2025. It's not likely, but my 401K plan is good enough that I'm willing to leave it there. It's with Fidelity and has a lot of pretty good fund options, including lowest-cost institutional share classes.

And in any event, though it's largely a non-factor in Texas, a 401K enjoys stronger asset protection laws than an IRA in the general case since a 401K (or 403B) is legally treated as a pension plan and protected as such by federal law.
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Old 04-10-2013, 12:11 PM   #10
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The problem for many is that many 401(k) plans do not allow periodic withdrawals. After DH retired - he was over 59 1/2 - he wanted to withdraw some money (but not all of it) from his 401(k) which was held at Fidelity. He was told that he had to either withdraw all the money or convert the 401(k) to an IRA. He was not allowed to take periodic withdrawals from the 401(k). You are fortunate if your 401(k) plan allows you to do so.
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Old 04-10-2013, 12:33 PM   #11
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He was not allowed to take periodic withdrawals from the 401(k). You are fortunate if your 401(k) plan allows you to do so.
Not sure about a periodic withdrawal plan but you are allowed to take out whatever you want after 59.5 and RMDs apply after 70.5. Maybe that's something specific to your 401k.
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Old 04-10-2013, 01:00 PM   #12
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Yes, the 55+ penalty free withdrawal option from 401k accounts is a nice option - providing your employer allows it as yours does. Here's one of several threads on the subject:

Retire at 55 and avoid 10% penalty?

I'm not understanding how an employer could deny the penalty-free withdrawals if the employee is 55 when they resign/retire. I recently had this arguement with the HR person where my wife works. I thought it was in the IRS regulations, not up to the individual employers. At the moment, about 2/3 of my wife's retirement $$ is in a Vanguard IRA, where she rolled it a few years ago when we relocated to another state for awhile. She never went to work there, & ended up moving back to her old (current) employer. I will be retiring this year, but she is only 52, and has about 2 3/4 yrs left till she can retire, and we thought....roll the IRA back into her 401k & then withdraw without penalty. This is a part of our plan for paying cash for our retirement home. Leave my money in my TSP & take monthly withdrawals, and pull her 401k penalty-free & pay for the house. Might not work for everybody, but it's our plan. Anyhow, the HR lady doesn't seem to understand the IRS reg, or at least reads it differently that I do. It seems pretty clear to me.....
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Old 04-10-2013, 01:05 PM   #13
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I'm not understanding how an employer could deny the penalty-free withdrawals if the employee is 55 when they resign/retire. I recently had this arguement with the HR person where my wife works. I thought it was in the IRS regulations, not up to the individual employers.
As I understand it, the law permits penalty free withdrawals from a 401k at age 55 but does not mandate that the plan offer that as an option.

I'll see if I can find something to document the rule.

EDIT: My statement above is incorrect. From the IRS 401k Resource Guide

Quote:
Exceptions. The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances:
  • 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.
There is no indication this is optional, meaning it should apply to all 401k account holders.

The source of my confusion is a previous discussion where an individual wanted to use the after 55 rule to set up periodic withdrawals from their 401k. The plan administrator would not agree due to the administrative cost to provide the service.

Sorry for the confusion. See my sig line...
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Old 04-10-2013, 01:27 PM   #14
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The source of my confusion is a previous discussion where an individual wanted to use the after 55 rule to set up periodic withdrawals from their 401k. The plan administrator would not agree due to the administrative cost to provide the service.
Ah. So maybe the plan wouldn't create an "automatic withdrawal service" so one could withdraw $X per month on schedule, but the individual could still go in and request a new withdrawal of $X once a month on their own?
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Old 04-10-2013, 01:40 PM   #15
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Ah. So maybe the plan wouldn't create an "automatic withdrawal service" so one could withdraw $X per month on schedule, but the individual could still go in and request a new withdrawal of $X once a month on their own?
I think this is the 2005 discussion that is the source of my confusion:
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As far as the age 55 rule, I believe there is no penalty for distributions made to an employee after leaving employment if the employee turns 55 that year. However, the employer doesn't have to allow you to spread out the withdrawls and might make you take the amount you want to withdraw all at once. This can lead to a big tax bill.
Sounds like the plan administrator can be very restrictive on your withdrawal frequency.
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Old 04-10-2013, 01:52 PM   #16
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This is a part of our plan for paying cash for our retirement home. Leave my money in my TSP & take monthly withdrawals, and pull her 401k penalty-free & pay for the house. Might not work for everybody, but it's our plan.
Marty,
Not to derail this thread, but: Taking the lump sum out of the 401K to pay for the house might be penalty-free, but it won't be tax free. That'll be a big jump in your income for that year--will probably push you into a higher bracket and cost quite a bit more directly and indirectly (e.g. loss of 0% CG rates and dividend rates within the 15% bracket, etc). Seems "nonoptimum" to pay maybe 10+% in extra taxes on this money when you could just get a 4% mortgage (which is probably only 1% real interest, after inflation) and pay it off with regular withdrawals taxed at your "normal" rate. And enjoy paying the house off with cheaper and cheaper dollars as inflation takes hold. Even if you just paid it off over 5-10 years it would smooth your withdrawals and keep them in a lower tax bracket.

Back to our regularly scheduled discussion . . .
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Old 04-10-2013, 01:54 PM   #17
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My husband was over 59 1/2 when he retired. It is without doubt that he could withdraw without paying any penalty (of course, he would have to pay the tax on the withdrawals).

However - his 401(k) plan (and anecdotally I have heard others say this at other places at well) required him after retirement to either take out all his money at once or to roll over to an IRA.
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Old 04-10-2013, 02:10 PM   #18
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Change custody of the 401k to a Vanguard account. Still a 401k, low cost, versatile options...

Contact VG - they can advise how.
You can do dat?

I'll look to see if my 401K allows it. I get the feeling some 401Ks are more equal than others IYNWIM.
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Old 04-10-2013, 02:19 PM   #19
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Originally Posted by martyb View Post
I'm not understanding how an employer could deny the penalty-free withdrawals if the employee is 55 when they resign/retire. I recently had this argument with the HR person where my wife works. ...Anyhow, the HR lady doesn't seem to understand the IRS reg, or at least reads it differently that I do. It seems pretty clear to me.....
Marty - Maybe you want to call the IRS? (I'd wait until after the 15th). They've been quite helpful to me in the past. You can remain anonymous, your calls are directed to an agent who only deals with a very specific area of the code, so they are very knowledgeable. They can refer you to pertinent pub and page #s.

Then you can go back to that HR person and give her what 'fer help educate her for her next victim retiree.

"I kid the HR community..."
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Old 04-10-2013, 02:24 PM   #20
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Change custody of the 401k to a Vanguard account. Still a 401k, low cost, versatile options...

Contact VG - they can advise how.
Is this a solo 401K? I thought that was for self-employed only?

Otherwise you would be rolling over a 401k to an IRA...
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