I've got a Solo 401K at Fidelity. On this board we have discussed the practicalities of beginning withdrawals at age 55 (rather than waiting for age 59 1/2) under the IRS rule that allows penalty-free distributions from 401Ks "after separation from service if separation from service occurred during or after the calendar year in which the participant reached age 55." I think many of us were of the opinion that this would have to be allowed by the plan document for the particular 401K. According to Fidelity (and Vanguard, who I called next), their plan documents make no reference to any waivers for withdrawals beginning at age 55--they will still be reported to the IRS as "early withdrawals" and subject to the 10% penalty tax if they are made before the recipient reaches age 59 1/2.
Anyway, for folks in a similar situation, I don't think that what the plan document says makes much of a difference. According to the IRS instructions, when I fill out my tax form at the end of the year I'd just need to fill out Form 5329 to tell the IRS (Line 2, reason "02") that the age 55 exception applies and no 10% penalty is due. I'm not sure if Fidelity will automatically withhold the 10% penalty on this "early withdrawal" but if they do it would be credited back to me in my taxes. At worst, I'd lose interest on the withheld money for the duration of the time it was in limbo.
So, that's my plan. It sounds easier than searching around for a custodian that includes the age 55 distribution caveat in their plan document, and more flexible than rolling all the dough to a tIRA and taking 72T withdrawals.
Note for Solo 401K holders: For this to work, you can't "separate from service" before the beginning of the calendar year in which you turn 55. I'm still trying to find info on how I notify the IRS that I've "separated from service" (fired myself?) without actually terminating the Solo 401K plan (termination of the plan would be reported on a Form 5500-EZ, box A(3). But if you terminate the plan and roll everything into a tIRA, you'd lose the ability to take unlimited distributions penalty-free before the year you reach age 59 1/2)
Anyway, for what it is worth . . .
Anyway, for folks in a similar situation, I don't think that what the plan document says makes much of a difference. According to the IRS instructions, when I fill out my tax form at the end of the year I'd just need to fill out Form 5329 to tell the IRS (Line 2, reason "02") that the age 55 exception applies and no 10% penalty is due. I'm not sure if Fidelity will automatically withhold the 10% penalty on this "early withdrawal" but if they do it would be credited back to me in my taxes. At worst, I'd lose interest on the withheld money for the duration of the time it was in limbo.
So, that's my plan. It sounds easier than searching around for a custodian that includes the age 55 distribution caveat in their plan document, and more flexible than rolling all the dough to a tIRA and taking 72T withdrawals.
Note for Solo 401K holders: For this to work, you can't "separate from service" before the beginning of the calendar year in which you turn 55. I'm still trying to find info on how I notify the IRS that I've "separated from service" (fired myself?) without actually terminating the Solo 401K plan (termination of the plan would be reported on a Form 5500-EZ, box A(3). But if you terminate the plan and roll everything into a tIRA, you'd lose the ability to take unlimited distributions penalty-free before the year you reach age 59 1/2)
Anyway, for what it is worth . . .
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