Roth 403b "rule of 55" question.

[Anita]

I actually spent a bit of time reading through IRS publications (Pub.571, Pub. 575, Topic 558...) and other webpages. I was unable to convince myself of a definitive answer to your question.

I will ask, however: Could your needs be met by rolling your Designated Roth 403(b) account to a Roth IRA? You would not have penalty-free access to the earnings, but you would have access to the contributions.

(Of course, this does not address the question of your already-made distribution.)

I want to thank you so much for that advice. I am in the process of rolling over all of my Roth 403b accounts into an existing Roth IRA I had for a number of years. I have more than enough contributions into my Roth 403b that will carry me until after I am 59 1/2. Your advice will literally save me tens of thousands in taxable earnings. Thanks a million!

 

[Out-to-Lunch]

So glad to hear that. You are more than welcome; I still wish we could get the answer to the original question, but so happy that you have a solution.

 

[pb4uski]

If it ends up that there is not a rule of 55 for a Roth 403(b) (which seems to be the case from what I could find), you may want to see if there is a window that you can return the money as a mistaken distribution or a rollover and avoid the 10% penalty.

I'm guessing that it is probably 60 days.

 

[gauss]

IRS Form 5329-Instructions

I think that the IRS instructions for form 5329 should answer all your questions. Especially pgs 3 and 4 including line 2 where you can remove the 10% penalty if the employer did not classify it correctly.

Line 2 - Exception #1 (ie the rule of 55)
"01 Qualified retirement plan distributions
(doesn’t apply to IRAs) you receive
after separation from service when
the separation from service occurs in
or after the year you reach age 55
(age 50 for qualified public safety
employees)."

Pretty straight-forward to me. No talk about the plan documents having to mention it, but this is commonly brought up as an issue -- in error IMHO.

So, from my perspective, what you are really asking - is a Roth 403(B) a qualified retirement plan?

I have been under the impression that it is, but I will let someone else chase this down.

Here is a link to the instructions for form 5329.
https://www.irs.gov/pub/irs-pdf/i5329.pdf

-gauss

 

[jazz4cash]

Congratulations, OP. You have managed to stump this forum in a way that rarely happens. It looks like you have some solutions and a plan even if we’re still not sure about the application of the age 55 exception to a Roth account. Good luck. Definitely get those Roth funds transferred over to a user friendly IRA custodian.

 

[armor99]

Hey guys....newbie here.



I have a Roth 403b. My company allowed me to use the "rule of 55" exception to retire early. I met the criteria set forth by the IRS and I then retired at the age of 56.



Here is my problem.. I made my first withdrawal of $30K from my account the other day. It was a money market account which has only returned about a half of one percent earnings in ten years. This means my earnings should have been negligible. Anyway...I never received a breakdown of the details in the mail or by email. When I received the check I was horrified that the fund administrator (not affiliated with my company) withheld over $3k (about 10%) from my distribution. I called them and they told me that the "age of 55 exception" does not apply to ROTH 403b accounts and that he is required by law to withhold 10% of the entire withdrawal. He called it "taxes" and not a "penalty".



Is this correct? Before I retired, I spoke sevetal times to other consultants from my fund management company and they informed me that I would not be subject to any 10% penalty or 10% taxes. I even clarified this with my company.



Anyway....does a Roth 403b allow for the "age of 55 exception" like the normal 403b does? Can someone reference the IRS rule or publication?

If not, shouldn't the fund manager have only withheld 10% of the "earnings" on my $30k withdrawal instead of the entire amount? If so...my earnings would be less than $150 which means they should have only withheld less than $15.



Anyway....thanks a bunch

Sadly... this is completely correct. For a ROTH 403b or 401k. You CAN, use the rule of 55. However, for those funds you are not allowed to take out your personal contributions first. Therefore, whenever you make the withdrawal, a certain percentage will be taxed. Which is against the whole reason you did a ROTH in the first place!
I plan on doing the following to avoid that trap.

Provided you have a ROTH IRA that has been in existence for 5 years, and then you Roll over your 401k or 403b into that ROTH IRA, you can INSTANTLY take out all of your personal contributions to what was in the ROTH 401k/403b with NO taxes or penalties whatsoever...

I plan on doing this between the ages of 55 and 59.5

 

[Out-to-Lunch]

I think that the IRS instructions for form 5329 should answer all your questions. Especially pgs 3 and 4 including line 2 where you can remove the 10% penalty if the employer did not classify it correctly.

Line 2 - Exception #1 (ie the rule of 55)
"01 Qualified retirement plan distributions
(doesn’t apply to IRAs) you receive
after separation from service when
the separation from service occurs in
or after the year you reach age 55
(age 50 for qualified public safety
employees)."

Pretty straight-forward to me. No talk about the plan documents having to mention it, but this is commonly brought up as an issue -- in error IMHO.

So, from my perspective, what you are really asking - is a Roth 403(B) a qualified retirement plan?

I have been under the impression that it is, but I will let someone else chase this down.

Here is a link to the instructions for form 5329.
https://www.irs.gov/pub/irs-pdf/i5329.pdf

-gauss

Wow, I think Gauss nailed it. I have never even heard of Form 5329, and it seems maddening that one would have to go to these lengths, but this reads correctly, IMHO>

Of course, if one does have enough in contributions, transferring to the Roth IRA route seems easier.