Hoping to Retire at 55 (72(t) question)

[CaLabasHlEaf]

Hoping to Retire at 55 (72(t)(2)(A)(v) question)

Hi all. Lurking for a while. Lots of great info. Thanks!

I will be 55 next year and hoping to FIRE at that time.
Before doing so, I wanted to look into 72(t)(2)(A)(v) ("the age 55 rule").
I called Vanguard and what the Vanguard representative told me is inconsistent with my understanding It is my understanding that you can withdraw from a company 401k without having to pay the penalty if you retire from the company in the year that you turn 55. In other words, no penalty for early withdrawal of funds from the company 401k at 55, 56, etc. as long as you left the company in the year you turned 55 or thereafter. It is also my understanding that if you move those funds out of that 401k, e.g., into an IRA that this will not work, i.e., you will have to pay the penalty. The Vanguard representative told me that you must cash out the entire account at once or rollover the entire account into an IRA.
Has anyone done this (withdraw some funds from company 401k between ages 55 and 59.5 after retiring during year turned 55 or later)? If so, did you have any issues/problems. I am guessing that the person at Vanguard does not understand and that I will be able to withdraw a portion of the 401k as long as I fill out the correct tax forms.

 

[Big_Hitter]

It is my understanding that you can withdraw from a company 401k without having to pay the penalty if you retire from the company in the year that you turn 55.

depends on what the plan document says - have you read the plan's SPD?

 

[CaLabasHlEaf]

Thanks. I do not know where hard copy is. I will get another copy.
I looked on the website for our plan and it does not mention it. I did not want to ask HR and they would just say check with Vanguard. So, I called Vanguard. The person on the phone admitted that she did not know. She then said that the plan does allow it based on whater the IRC says. She then gave me her interrpretation of what it said (as described in original post).

 

[bingybear]

Hi all. Lurking for a while. Lots of great info. Thanks!

I will be 55 next year and hoping to FIRE at that time.
Before doing so, I wanted to look into 72(t) ("the 55 rule").
I called Vanguard and what the Vanguard representative told me is inconsistent with my understanding It is my understanding that you can withdraw from a company 401k without having to pay the penalty if you retire from the company in the year that you turn 55. In other words, no penalty for early withdrawal of funds from the company 401k at 55, 56, etc. as long as you left the company in the year you turned 55 or thereafter. It is also my understanding that if you move those funds out of that 401k, e.g., into an IRA that this will not work, i.e., you will have to pay the penalty. The Vanguard representative told me that you must cash out the entire account at once or rollover the entire account into an IRA.
Has anyone done this (withdraw some funds from company 401k between ages 55 and 59.5 after retiring during year turned 55 or later)? If so, did you have any issues/problems. I am guessing that the person at Vanguard does not understand and that I will be able to withdraw a portion of the 401k as long as I fill out the correct tax forms.

I'm a bit lost with your post. I believe you are right with the 401k withdraw after leaving employment at 55... see here. The 72t is completely different and involves taking equal payments based on life expectancy and requires you continue until 59.5.

 

[CaLabasHlEaf]

Bingy -
My apologies for any confusion. It is 72(t)(2)(A)(v), also known as the "age 55 rule".
Please note that it "may" be available. It is not allowed by all plans. That is why I wanted to check with Vanguard. As mentioned above, the Vanguard representative said that our plan does support it. But, she followed it up with a requirement that would destroy use of this section, i.e., she said needed to take as lump sum (pay taxes on all of it) or rollover all of it to an IRA (which "busts" the rule thereby having to pay the penalty on withdrawals prior to age 59.5).

 

[cyber888]

The age 55 rule is different from the 72t rule.

The 55 rule for the 401K just means that when you retire from the company at age 55 or older (but less than 59.5), you can withdraw from your 401K without any penalty. But you still have to pay regular taxes. You can withdraw any amount. And yes, do not transfer your 401k to an IRA or the 55 yr rule won't apply.

The 72T withdraw can be done even if you are not yet 55 years old. You can be 38 or 45 years old and you can do the 72T withdrawal method. The 72T means you are allowed to withdraw from your 401K even at a young age, but you must withdraw in equal payments until you hit 59.5 years old. You cannot alter the yearly amount you withdraw, or you will pay the penalty. So, let's say you retired at 45, and you decide to withdraw $15,000 per year from your 401K, you must continue to withdraw $15,000 per year until you hit 59.5 in order to escape the penality. So as you can see, the 55 rule is different from the 72t.

 

[Al18]

I bet the Summary Plan Description (SPD) does not contain information about distributions. Distributions are covered in a separate document called the Participant Distribution Notice.

 

[CaLabasHlEaf]

I bet the Summary Plan Description (SPD) does not contain information about distributions. Distributions are covered in a separate document called the Participant Distribution Notice.

Thanks! I will look into that.

 

[CaLabasHlEaf]

The age 55 rule is different from the 72t rule.

The 55 rule for the 401K just means that when you retire from the company at age 55 or older (but less than 59.5), you can withdraw from your 401K without any penalty. But you still have to pay regular taxes. You can withdraw any amount. And yes, do not transfer your 401k to an IRA or the 55 yr rule won't apply.

The 72T withdraw can be done even if you are not yet 55 years old. You can be 38 or 45 years old and you can do the 72T withdrawal method. The 72T means you are allowed to withdraw from your 401K even at a young age, but you must withdraw in equal payments until you hit 59.5 years old. You cannot alter the yearly amount you withdraw, or you will pay the penalty. So, let's say you retired at 45, and you decide to withdraw $15,000 per year from your 401K, you must continue to withdraw $15,000 per year until you hit 59.5 in order to escape the penality. So as you can see, the 55 rule is different from the 72t.

The "age 55 rule" is 72(t)(2)(A)(v). Again - that is a Subsection of 72(c). My apologies again for any confusion.

 

[papadad111]

Yup. Everyone gets lazy and just says 72t and thinks it's the equal withdrawal over time. Here is the naming convention :

1. §72(t)(2)(A)(v) is option to which you refer when leaving assets in the employers plan. NOTE: You do not have to be 55 when you leave; you must simply turn 55 within the same calendar year as when you leave. Then you can withdraw with impunity from the plan and pay no penalty. You are on limited in how cooperative the plan administrator will be in handling your withdrawal requests.

2. §72(t)(2)(A)(iv) is substantially equal periodic payments. This is your second option & best iginored if you can do #1 above. search for "72(t)" & "SEPP" .


Note one is section iv and the other v

 

[SteveNU]

I retired at 56 and my plan did allow withdrawals at 55. It is spelled out in the SPD for our plan as follows:

When a Participant receives a taxable distribution or withdrawal from the Plan, it will be treated as ordinary income in the year received. In addition, a penalty in the form of a 10 percent excise tax may apply to early distributions or withdrawals. This 10 percent tax will not apply if:

The distribution is made because the Participant left the Company or retired in a calendar year in which he or she is at least age 55.


Sent from my Nexus 7 using Early Retirement Forum mobile app

 

[2017ish]

Thanks. I do not know where hard copy is. I will get another copy.
I looked on the website for our plan and it does not mention it. I did not want to ask HR and they would just say check with Vanguard. So, I called Vanguard. The person on the phone admitted that she did not know. She then said that the plan does allow it based on whater the IRC says. She then gave me her interrpretation of what it said (as described in original post).

I would send a formal request to HR, or to whomever is a named fiduciary for the plan (depending upon employer size). The SPD is a legal requirement for benefit of the employees and you are entitled to it. (Can always say you are trying to figure out how things work for future, or want it to show why friend's company should improve their plan....)

I also requested the actual governing documents for both of our plans, not just the SPDs, so that I would have a better understanding of things than the HR at our two small employers.... Those documents, however, are not as easily understandable to most people; hence, the SPD.

 

[Big_Hitter]

I bet the Summary Plan Description (SPD) does not contain information about distributions.

how much do you want to bet?

 

[tmm99]

I retired at 56. My SPD said I could get distributions without penalty. (They honor the age 55 rule.) Surprisingly my HR exit interview contained this information and the representative went over it.

I contacted my 401K provider and they said I could do a partial rollover of my 401K to an IRA of my chosen brokerage. They said it is very similar to taking a distribution in the sense that I can even do it many times a year if I wanted to.

My 401K sucks in one way - they will only let me get distributions in the same allocation as the money is invested. (They won't let me specify which fund to get the money out of. They will take the same percentage (proportionately) out of every fund I have money invested in.) ) I was thinking of putting everything in stable value when the market is up again and then move a portion of it to IRA but I am still waiting for the market to come back up....

Anyway those are the things you want to find out IMHO.


Sent from my iPhone using Early Retirement Forum

 

[CaLabasHlEaf]

I retired at 56. My SPD said I could get distributions without penalty. (They honor the age 55 rule.) Surprisingly my HR exit interview contained this information and the representative went over it.

I contacted my 401K provider and they said I could do a partial rollover of my 401K to an IRA of my chosen brokerage. They said it is very similar to taking a distribution in the sense that I can even do it many times a year if I wanted to.

My 401K sucks in one way - they will only let me get distributions in the same allocation as the money is invested. (They won't let me specify which fund to get the money out of. They will take the same percentage (proportionately) out of every fund I have money invested in.) ) I was thinking of putting everything in stable value when the market is up again and then move a portion of it to IRA but I am still waiting for the market to come back up....

Anyway those are the things you want to find out IMHO.


Sent from my iPhone using Early Retirement Forum

Thank you.

 

[CaLabasHlEaf]

Yup. Everyone gets lazy and just says 72t and thinks it's the equal withdrawal over time. Here is the naming convention :

1. §72(t)(2)(A)(v) is option to which you refer when leaving assets in the employers plan. NOTE: You do not have to be 55 when you leave; you must simply turn 55 within the same calendar year as when you leave. Then you can withdraw with impunity from the plan and pay no penalty. You are on limited in how cooperative the plan administrator will be in handling your withdrawal requests.

2. §72(t)(2)(A)(iv) is substantially equal periodic payments. This is your second option & best iginored if you can do #1 above. search for "72(t)" & "SEPP" .


Note one is section iv and the other v

Not lazy. I did initially not include the entire sub-section although I did describe the provision including that the retirment just needs to be in year turn 55. And, as soon as I saw that someone was confused, I gave the subsection number.
But, thank you for your "response" just to call me and others lazy.

 

[OrcasIslandBound]

This is a good discussion about partial withdrawals from the 401k plan after one turns 55. I checked into this regarding my own companies 401k and determined that it would work for me if I ever needed it. However, we have changed plans since that time and I now need to recheck this. It is a given that I could withdraw the whole thing, but have no intention of doing that. The crux of the issue is can I do partial withdrawals? This varies from plan to plan. I think probably yes, but don't know for sure yet.

Sent from my Nexus 4 using Early Retirement Forum mobile app

 

[MRG]

I've done three penalty free distributions from my 401K starting at age 56.

As mentioned the SPD must include the verbiage. Your SPD should be available from HR or benefits. Then the custodian must have a way to distribute the funds(some are limited to a one time deal). After that it's fill out the paperwork and wait.

As mentioned the age of 55 is really different than a 72t. Both logically accomplish the same thing, the 72t more involved.

 

[pb4uski]

...My 401K sucks in one way - they will only let me get distributions in the same allocation as the money is invested. (They won't let me specify which fund to get the money out of. They will take the same percentage (proportionately) out of every fund I have money invested in.) )...

But can't you then just get online and rebalance it to what you want? We could do such rebalancing with my former employer.

 

[tmm99]

But can't you then just get online and rebalance it to what you want? We could do such rebalancing with my former employer.

I don't get what you mean.... Can you elaborate?

Let's say I have 4 funds in my 401K -

40% VTI (400K),
40% BND (400K),
10% VXUS (100K),
10% Stable Value Fund (100K).

Let's say I want to rollover 10% of my 401K to an IRA. My 401K provider will take out

10% of VTI (40K),
10% of BND (40K) and
10% of VXUS (10K) and
10% of Stable Value (10K)-

I cannot tell them to just just take 100% of Stable Value funds (100K) to my rollover IRA (which I wanted to do before I found out I couldn't).

The allocation after taking 10% out from 401K to IRA will still be the name as before - (40% VTI, 40% BND, 10% VXUS 10% stable value). The same thing with getting distributions from my 401K. I cannot specify which fund to draw the money from. Because of this restriction, I feel I have to make sure I only pull out money from 401K when the stock market is up, not down like it is now.

I have a few years of cash and that will last me past 59.5 years, but I was considering spending some tax deferred money now to preserve the after-tax money (close to 70% of my money currently is in tax deferred.) I also would like to roll over a major portion (perhaps 80%) of my 401K to an IRA and leave a little in my 401K just in case since I can take money out of there with no penalty while I couldn't from an IRA.

I guess I could just take out some funds proportionately across all my funds to a rollover IRA they way my 401K allows, and make a similar asset allocation in the rollover IRA when the money arrives there, but I am afraid the market condition being so volatile that I don't want to end up pulling out equities when prices are low and cannot get back into the market in the rollover IRA because the market has already gone up. (It's OK to sell low and buy low, but I ended up losing a lot of money on my money move from US to Canada since Fidelity's check didn't get to RBC for over a month (the first one got lost and they had to reissue) and I ended up buying higher...)

Anyway, if I am missing something in my logic, I am all ears

 

[2017ish]

I don't get what you mean.... Can you elaborate?

Let's say I have 4 funds in my 401K - 40% VTI, 40% BND, 10% VXUS, 10% Stable Value funds. Let's say I want to rollover 10% of my 401K to an IRA. My 401K provider will take out 10% of VTI, 10% of BND and 10% of VXUS and 10% of Stable Value - I cannot tell them to just just take 100% of Stable Value funds (which is 10% of my 401K total) to my rollover IRA (which I wanted to do before I found out I couldn't).

...

THIS PARAGRAPH IS WRONG!_[-]___Assuming, for ease of discussion, that you withdrew $1000. Could you not, after the withdrawal, sell $400 VIT, $400 BND and $100 VXUS and put the $900 into the Stable value? (Maybe there are restrictions on stable value, which we don't have available to us in our plans??)___[/-]

Second try: Couldn't you sell 900 of the stable value after the withdrawal and use the proceeds internally to buy 400 VIT, 400 BND, and 100 VXUS?

 

[pb4uski]

I don't get what you mean.... Can you elaborate?....

You have them take the $100k out and they do it proportionally. Then you rebalance to what it would have been if you took $100k out of SV as you wanted but could not do because of their policy by selling 90 of SV and buying 40 of VTI, 40 of BND and 10 of VXUS. My ex-employer plan allowed us to move between funds as we wanted just like an IRA.

	Beg	Withdrl	Rebal	End
VTI	400	(40)	40	400
BND	400	(40)	40	400
VXUS	100	(10)	10	100
SV	100	(10)	(90)	-
Total	1,000	(100)	-	900

 

[tmm99]

pb4uski and 2017ish,

I now know what you were trying to tell me - Thank you for your explanation.

Yes, I can rebalance without any issues. I could even rebalance every day if I wanted to - My 401K would let me. Sorry I was clear - my issue is more to do with all my funds (including equity funds) being dipped into when I take any money out of my 401K. I'd rather take out money only from SV. That's the flexibility my 401K lacks. I hate to sell low on funds that have lost a lot.

A part of me says theoretically, if I can move the money to IRA and can get like funds right away, there is no loss (that would be sell low and then buy low) which is true, but I had a bad experience moving money last time (it took too long to move) and ended up losing money so I am weary... The best scenario is the DJIA goes back up close to the 18,000 level and I move everything in 401K to SV and take 80% out to be moved to my rollover IRA (and rebalance my 401K once the money has been taken out) and put back the newly moved money in my IRA into the market gradually when I want to. (Even if the market goes up above 18,000 and I miss some opportunities because I am slow in moving the money back into the market, I am OK with it. From what I can see right now though, 18,000 seems to be some kind of resistance level and it may not go above that for a long time...)

 

[skibum]

My 401k plan allows the penalty free withdrawals after leaving co. in the year turning 55 or older. Fidelity is the plan administrator, and there is a limit of two withdrawals per year. Withdrawals can be made online or with a phone rep, and execute in a day or two.

I don't understand the IRA transfer tactics discussed. The law does not allow penalty free withdrawals at age 55-59.5 from IRAs or other 401k plans. Perhaps the strategt is for rebalancing and all withdrawals are from the 401k plan from which employee left in year turning age 55.

 

[jIMOh]

Hi all. Lurking for a while. Lots of great info. Thanks!

I will be 55 next year and hoping to FIRE at that time.
Before doing so, I wanted to look into 72(t)(2)(A)(v) ("the age 55 rule").
I called Vanguard and what the Vanguard representative told me is inconsistent with my understanding It is my understanding that you can withdraw from a company 401k without having to pay the penalty if you retire from the company in the year that you turn 55. In other words, no penalty for early withdrawal of funds from the company 401k at 55, 56, etc. as long as you left the company in the year you turned 55 or thereafter. It is also my understanding that if you move those funds out of that 401k, e.g., into an IRA that this will not work, i.e., you will have to pay the penalty. The Vanguard representative told me that you must cash out the entire account at once or rollover the entire account into an IRA.
Has anyone done this (withdraw some funds from company 401k between ages 55 and 59.5 after retiring during year turned 55 or later)? If so, did you have any issues/problems. I am guessing that the person at Vanguard does not understand and that I will be able to withdraw a portion of the 401k as long as I fill out the correct tax forms.

72t pertains to IRAs, right?
you are asking questions about a 401k

for a 401k check the plan documents. is the 401k with Vanguard? if not, talk to the plan administrator or custodian for the plan rules.

If you roll the 401k into an IRA, then rule 72t could apply