Retire at 55 and avoid 10% penalty?

[Backpacker]

I was sitting in on a meeting with my companies 401k administrator, we may be making some changes and the HR lady asked me to sit in.

In the course of conversation and reading over the 401k plan details I read that if you work until age 55 and retire you can get $ out of 401k's with out paying the IRS the 10% penalty (blood money). I must admit this caught me by suprise; I had always heard that you had to be 59 & 1/2.

They claim if the early distribution happens when my employment ends and I am 55 or older then no 10% penalty. If my employement ends at 54 or less then I must wait until 59 & 1/2 to avoid the penalty.

I still need to find out if I can take a partial w/d or if I need to take it all; obviously if I had to take it all I wouldn't want to get taxed on full amount all in one year.

 

[REWahoo]

I still need to find out if I can take a partial w/d or if I need to take it all; obviously if I had to take it all I wouldn't want to get taxed on full amount all in one year.

Yes, you need to see if your company/401k administrator will allow periodic partial distributions from your 401k after age 55. Some do but many don't want the administrative hassle and won't do it.

Good luck.

 

[donheff]

If they don't want to do partial distributions couldn't you roll the whole lot over to an IRA and then use 72t to start taking money out without penalty?

 

[wanaberetiree]

If they don't want to do partial distributions couldn't you roll the whole lot over to an IRA and then use 72t to start taking money out without penalty?

In my opinion - yes, but after 59 1/2

 

[KM]

In my opinion - yes, but after 59 1/2

You can use the 72t rule before 59 1/2. That's how you get around the 10% penalty.

 

[travelover]

You can use the 72t rule before 59 1/2. That's how you get around the 10% penalty.

Correct

 

[SteveL]

I think most 401k plans provide for life expectancy withdrawals after retirement whether at 55 or later. This is different than a partial withdrawal.

 

[steelyman]

One thing I think is relevant is that for the distributions when retiring in the year you turn 55 must be left in the employer plan - no rolling over anything to an IRA.

As REWahoo said, you'll want to check with the administrator to be sure.

 

[misty57]

The rule has been in effect for quite some time. DH is separating from his company at age 55 in early 2012. It is the magic age for the earliest you can receive a pension, the earliest you can retire and get retiree medical, and the earliest to be able to withdraw from your 401k without the 10% penalty so 55 it is.

 

[East Texas]

One thing I think is relevant is that for the distributions when retiring in the year you turn 55 must be left in the employer plan - no rolling over anything to an IRA.

We rolled over to an IRA.

 

[FinanceDude]

72t is used by anyone who retires before 59 1/2, you just need to commit to "substantially equal payments"............

 

[steelyman]

We rolled over to an IRA.

I didn't mean to imply that a rollover is not allowed - certainly it is once you separate from the employer - but rather that taking distributions without the 10% penalty must be done from the 401(k) (or 403(b)). Caveat: I am by no means an expert.

 

[wanaberetiree]

I didn't mean to imply that a rollover is not allowed - certainly it is once you separate from the employer - but rather that taking distributions without the 10% penalty must be done from the 401(k) (or 403(b)). Caveat: I am by no means an expert.

That was understanding too, but now I am confused. Is anybody taking 72t early distributions at 55+ from an IRA (not 401(3)-K(b)) account?

 

[East Texas]

I didn't mean to imply that a rollover is not allowed - certainly it is once you separate from the employer - but rather that taking distributions without the 10% penalty must be done from the 401(k) (or 403(b)). Caveat: I am by no means an expert.

If you're talking specifically about distributions, you're right. You can take a distribution from the 401K if you retire on or after 55. If you rollover to an IRA you must wait until 59 1/2 to avoid the penalty.

Excluding the 72t situation, the caveat on the 401K withdrawal is you can only take penalty free withdrawals from the company from which you retired on or after age 55, not a previous employer. Those monies would be subject to the 10% penalty.

If/When interest rates improve, we're moving our IRAs to a SPIA. Oh, I wish I had a crystal ball.

 

[clifp]

That was understanding too, but now I am confused. Is anybody taking 72t early distributions at 55+ from an IRA (not 401(3)-K(b)) account?

You can take distributions at any age from IRA via a 72(t). I am not 100% sure but I think that 72(t) distribution are only allowed from an IRA, not 401K, or a 403B.

The benefits from taking distribution from a 401K after 55 is you have more flexibility than 72(T) distributions. So for instance you can increase, decrease or completely eliminate withdrawals from a 401K, where as with 72(t) distribution from a IRA they are more or less a fixed amount. (With some exceptions.)

In all case you want to do this to avoid the 10% penalty.

 

[misty57]

Excluding the 72t situation, the caveat on the 401K withdrawal is you can only take penalty free withdrawals from the company from which you retired on or after age 55, not a previous employer. Those monies would be subject to the 10% penalty.

Interesting. I did not know that. It does not apply to us though as DH has worked for the same company his entire career so only one 401k.

 

[rescueme]

As others have mentioned, you need to check with the plan administrator for your specific situation.

When I turned 55, I was able to rollover a portion of my 401(k) to a non-traditional IRA account in order to get access to funds other than offered just through the 401(k).

Both were through FIDO.

My DW (being the same age, and the same 401(k) provider - FIDO) could not do the same - she wor*ed for a different company.

It's a combination of rules - both the government and your local plan administrator who says if you can/cannot do a partial rollover (not withdrawl) while employed.

 

[kaneohe]

Excluding the 72t situation, the caveat on the 401K withdrawal is you can only take penalty free withdrawals from the company from which you retired on or after age 55, not a previous employer. Those monies would be subject to the 10% penalty.
.

Interesting......didn't know that either. Here's something from retireearly site
that agrees:

You can make penalty-free withdrawals from a 401(k) at age 55. You must wait until age 59 1/2 to make penalty-free withdrawals from an IRA. While this seems like a big break for a 55-year-old retiree, there are several things to consider; (1) Your employer must make it convenient for an ex-employee to make retirement withdrawals, many employers can't be bothered, (2) Rolling over your 401(k) funds to an IRA may increase the variety of investments available to you and lower your fees. If that's the case, the hassle of SEPP withdrawals from an IRA may be worth it.

Note: There is one fine point that many people miss in taking penalty-free withdrawals from a 401k at age 55. To do so, you must terminate your employment no earlier that the year in which you turn age 55. (See IRS Notice 87-13) If you retired at age 54 and waited until age 55 to make withdrawals from your 401k, you would not be able to make unlimited penalty-free withdrawals. You could only make penalty-free withdrawals by using SEPP.

 

[Backpacker]

I am a bit afraid of locking in to 72t substantial equal distributions. It will be nice to have the option of w/d from 401k before 59 & 1/2. Previously I had considered the option of w/d from Roth, but I really want to leave that alone as long as possible.

DW has 403b, anyone know for sure if age 55 rule is same for 403b?

 

[martyb]

Some 401k plan administrators allow the regular distributions, and some don't. I don't think they are required by law to accomodate the age 55 withdrawals. By law, it's allowed, but I don't think individual plans are forced to accept the administrative burden if they don't want to. Meaning....yes it's legal to withdraw from your 401k if you retire at or after age 55, but your plan admin may or may not participate in that option.They have to be willing to do the accounting & bookeeping work. If not, then you might have to make other plans...IRA, 72t etc.

 

[kaneohe]

DW has 403b, anyone know for sure if age 55 rule is same for 403b?

from........403(b)wise : 403(b) FAQs


When can 403(b) money be accessed without penalty?
Generally, penalty-free distribution from a 403(b) cannot occur until the participant:

Reaches age 59 1/2

Separates from service in the year turning 55 (and must be retired)

Retire before age 55 — eligible for Substantially Equal Periodic Payments (SEPP). Participants who have retired early (before age 55), but want access to their 403(b) without penalty can do so using SEPP. This provision requires that you take a series of substantially equal periodic payments. The key is that once you start these payments they must continue for five years or until you reach 59 1/2, whichever takes longer. If you start at age 58 you must continue until you are 63 (minimum 5 years).

Becomes disabled (as defined in section 72(m)(7) of the Internal Revenue Code)

Through a loan (some investment companies allow this, some do not)

Dies

Consulting a tax professional before accessing 403(b) money is highly recommended.

 

[East Texas]

Interesting......didn't know that either. Here's something from retireearly site
that agrees:

You can make penalty-free withdrawals from a 401(k) at age 55. You must wait until age 59 1/2 to make penalty-free withdrawals from an IRA. While this seems like a big break for a 55-year-old retiree, there are several things to consider; (1) Your employer must make it convenient for an ex-employee to make retirement withdrawals, many employers can't be bothered, (2) Rolling over your 401(k) funds to an IRA may increase the variety of investments available to you and lower your fees. If that's the case, the hassle of SEPP withdrawals from an IRA may be worth it.

Note: There is one fine point that many people miss in taking penalty-free withdrawals from a 401k at age 55. To do so, you must terminate your employment no earlier that the year in which you turn age 55. (See IRS Notice 87-13) If you retired at age 54 and waited until age 55 to make withdrawals from your 401k, you would not be able to make unlimited penalty-free withdrawals. You could only make penalty-free withdrawals by using SEPP.

You must retire in (or after) the calendar year in which you turned 55 - not necessarily be 55 at retirement. If you retired in January and turned 55 in December, you're home free.

 

[777re777]

The rule has been in effect for quite some time. DH is separating from his company at age 55 in early 2012. It is the magic age for the earliest you can receive a pension, the earliest you can retire and get retiree medical, and the earliest to be able to withdraw from your 401k without the 10% penalty so 55 it is.

Do you have to keep the 410K money right where it's at, or can you relocate to another 401K plan. Example relocate from TRowe to Wells Fargo?