A snag with Vanguard 401K partial withdrawal when retiring before age 59 1/2

FYI, a snag in my plans to rollover my 401K.

I retired at 56 this spring and have a Vanguard 401K plan. It has pretax, after tax, and Roth 401K funds.

I requested to transfer my pretax money into an IRA, my after-tax funds into a brokerage account and leave my Roth 401K funds in the Vanguard plan until I turn 59 1/2. I have very limited investment choices in my 401K and wanted a wider choice in an IRA.

I talked this over face-face with my company’s Vanguard rep prior to retirement because my plan document is silent on pre 59 1/2 partial withdrawals.
It only states you won’t have to pay a 10% penalty if retired and older than 55. Thought my plan was solid after the discussion.


Tried to make rollovers happen last week and Vanguard told me I had to withdraw all funds from the 401K to keep pretax, after tax, and Roth funds separate.
A full withdrawal resets my 5 year Roth clock (2010 date) by going from a Roth 401K to a Roth IRA.
That was unacceptable because I had planned withdrawals from my Roth at 59 1/2.

Even worse, I was told any partial 401K withdrawals would be an equal percentage from after tax, pretax, and Roth. This results in a Roth withdrawal penalty and commingles after tax with pretax savings.

I appealed to a higher level inside Vanguard sine this will cause me financial harm and asked for a written statement of the partial withdrawal policy. I was told by the “expert” that since a partial withdrawal that keeps funds separate isn’t specifically stated in the former company’s plan document then it is disallowed.

Much discussion ensued, I had a copy of the document and had read it thoroughly. I realized there was no changing his arbitrary decision and decided to try a different approach.

Fortunately I had kept the Vanguard company rep’s phone number and gave him a call.
He recognized how illogical Vanguard corporate is responding and said he has had other company clients’ retired before 59 1/2 proceed with partial withdrawals exactly like I wanted.

He contacted corporate Vanguard and has created an amendment to my former company’s plan document specifically addressing pre 59 1/2 retiree partial withdrawals that keeps funds separate.

He expects my former company HR to accept the amendment next week. Lucky I worked at a small company and am still friends with execs and HR management so I’m expecting a positive outcome. Keeping fingers crossed.

Good Job!!.
You have joined the Vanguard OMG club of administrative state Purgatory--if very lucky you will be able to escape much wiser and hopefully np poorer, You are very lucky to have been able to have contact with a rare beast in Vanguard--a rep who can think independently and is willing to take action

My husband's 401K is with Vanguard also and is similarly composed. I've also received conflicting/incorrect info from them often enough that it'll be a pleasure to get the money away from them after he retires. That said, there is some info at the IRS website:

https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans

"If your account balance contains both pretax and after-tax amounts, any distribution will generally include a pro rata share of both.

Example: Your account balance is $100,000, consisting of $80,000 in pretax amounts and $20,000 in after-tax amounts. You request a distribution of $50,000. Your distribution consists of $40,000 pretax and $10,000 after-tax."

Further down the page:

"Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account."

This may extend to the Roth 401K funds as well.

It doesn't sound as though you can choose to leave the Roth 401K portion in the plan, while rolling over the rest. But please do keep us posted on this.

lwp2017 said:

A full withdrawal resets my 5 year Roth clock (2010 date) by going from a Roth 401K to a Roth IRA.
That was unacceptable because I had planned withdrawals from my Roth at 59 1/2.

Click to expand...

If you already have a Roth IRA opened from years ago, rolling over to it now doesn't reset the clock.

I just went through a similar situation in that Vanguard is the manager/custodian of my previous employer's 403b and 401a plans. I also have individual accounts at VG. The rules are different and set by the employer. Even the UI is different. They have really dumbed down the UI for the employer portion into graphs and colors with very little numbers unless you click through. It is also difficult to figure out where to find stuff in that employer UI. I converted all of my 401a and will need to see if I can intermittently rollover parts of the 403b, although, I'm willing to bet I'll have to do a full rollover....

Two good things about the employer VG - free access to Financial Engines and lower administrative fees. However, as I am no longer employed, the money just sits there without any extra deposits.....of course for the most part it grows

You might try posting your situation in the Retirement sub-forum at
fairmark.com and look for an Alan S. reply.

https://www.investopedia.com/ask/answers/101314/what-are-roth-401k-withdrawal-rules.asp

perhaps if your withdrawal from Roth 401K was not a qualified withdrawal, when it rolls over to Roth IRA any time
spent in the 401K does not count toward any 5 yr clocks in the Roth IRA. If you created your first Roth IRA to house the rollover from the Roth 401K,you would have to wait 5 yrs until your 1st Roth IRA was 5 yrs old. However since you have a pre-existing Roth IRA, the age of the oldest Roth IRA should not change and it is possible the bottleneck will be your age.....waiting for 59.5, not IRA age..........Alan S.
will know.

Vanguard rep came through and revised my former company’s 401K plan document as requested, former company agreed. I feel very fortunate to get that level of support in just a few days.

I was able to transfer after tax contributions separate from untaxed gains today.

Will rollover untaxed gains on pretax money to external IRA next week.

Will be able to keep Roth 401K at Vanguard at start withdrawals at 59 1/2 as planned.