401(k) and Retirement Age of 50

[Buckeye]

I made a comment in another thread about my employer allowing penalty-free 401(k) distributions starting at age 50. Several folks commented they didn't think this was possible so I asked some additional questions.

I confirmed with our HR VP (who does all the 401(k) stuff and IS our HR department) the lack of a penalty was was not related to 72(t). He said our normal retirement age is 50 and the ability to retire at 50 and take penalty free withdrawls was approved by the IRS in writing. Is it because our normal retirement age is 50 which is lower than I've ever seen? Our plan also takes 401(k) rollovers from other plans so I can move other money into my current 401(k) and have it qualify for "early" distribution.

HR VP said the tax preparer of someone who retired last year at around 50 was having a tough time understanding how the retiree could take withdrawals and not have to pay a penalty but that is how our plan is structured. Is the IRS basically looking at the code on the 1099 to see if an early withdrawl penalty applies? If the code is "correct", no penalty?

I also posted the question on the Fairmark message board to see if any of the tax pros have heard of this. I have no reason to believe VP of HR is not telling the truth or hasn't followed all the rules required to make this so. We have a nice plan with good matching and profit sharing and both the the regular and the Roth 401(k) option.

Comments?

[jdw_fire]

Quote:

Originally Posted by Buckeye I confirmed with our HR VP (who does all the 401(k) stuff and IS our HR department) the lack of a penalty was was not related to 72(t). He said our normal retirement age is 50 and the ability to retire at 50 and take penalty free withdrawls was approved by the IRS in writing.

I'd suggest you get a copy of this letter(?) from the IRS for your records.

[smileydog]

If you can get that letter and confirm with a tax attorney... then Great! I wish I had that option.

[LOL!]

From the info you have given, there is no reason for me to believe your HR VP. His name could be Jeff Skilling for all I know.

Our HR folks tell me things as well, but I ask them over and over to confirm the info. After I give them highlighted IRS publications they end up paying for a consultation with a lawyer and then changing their story to match my original story.

Moral of this: The HR folks are people just like you and me: clueless. But you may well ask, where does cluelessness stop? I am clueless about how to answer that.

[chinaco]

Bottom line.... Your HR dept is not who the IRS will go after.

Since it seems to be a deviation from the norm... I would seek some additional confirmation.

[Buckeye]

Because it is an unusual situation, I will probably call the IRS myself after tax season is over and see if something like this is possible in general.

We are a small to mid-size company that has been in business for 50 years and does EVERYTHING by the rules so I have no reason not to believe my HR guy (who is not like a Megacorp HR guy). The owners are extremely honest and ethical people who I have known for 15 years which is why I accepted their offer of employment after working for two companies with ethically-challenged management.

But I agree, it appears very unusual.

[crazy connie]

It should be articulated in the plan documents which are unique to each company. Confirm that and then I am very jealous! Wish my company had been so decent!

[yakers]

I am surprised. Even within the government an early retiree cannot access their TSP (401k type) account before 55. And the Govt has some positions that would require retiring or at least changing positions, by 50 although 55 is more common.

[eridanus]

What everyone else wrote. You need a copy of the IRS Private Letter Ruling.

[Martha]

http://www.irs.gov/publications/p575/ar02.html#d0e4324 says this about the 10% tax or penalty:

General exceptions. The tax does not apply to distributions that are:
Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service). See Substantially equal periodic payments, later,

Made because you are totally and permanently disabled, or

Made on or after the death of the plan participant or contract holder.


Additional exceptions for qualified retirement plans. The tax does not apply to distributions that are:
From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees),

From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order,

From a qualified retirement plan to the extent you have deductible medical expenses (medical expenses that exceed 7.5% of your adjusted gross income), whether or not you itemize your deductions for the year,

From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election,

From an employee stock ownership plan for dividends on employer securities held by the plan,

From a qualified retirement plan due to an IRS levy of the plan, or

From elective deferral accounts under 401(k) or 403(b) plans, or similar arrangements, that are qualified reservist distributions.


Qualified public safety employees. If you are a qualified public safety employee, distributions made after August 17, 2006, from a governmental defined benefit pension plan are not subject to the additional tax on early distributions. You are a qualified public safety employee if you provided police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service after you attained age 50.

Qualified reservist distributions. A qualified reservist distribution is not subject to the additional tax on early distributions. A qualified reservist distribution is a distribution (a) from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement, (b) to an individual ordered or called to active duty (because he or she is a member of a reserve component) for a period of more than 179 days or for an indefinite period, and (c) made during the period beginning on the date of the order or call and ending at the close of the active duty period. You must be ordered or called to active duty after September 11, 2001, and before December 31, 2007.





Additional exceptions for nonqualified annuity contracts. The tax does not apply to distributions that are:
From a deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982,

From a deferred annuity contract under a qualified personal injury settlement,

From a deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan and held by your employer until your separation from service, or

From an immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within one year from the date of purchase and are paid at least annually).


Substantially equal periodic payments. Payments are substantially equal periodic payments if they are made in accordance with one of the following methods.
Required minimum distribution method. Under this method, the resulting annual payment is redetermined each year.

Fixed amortization method. Under this method, the resulting annual payment is determined for the first distribution year and remains the same amount for each succeeding year.

Fixed annuitization method. Under this method, the resulting annual payment is determined for the first distribution year and remains the same amount for each succeeding year.

For information on these methods, see Revenue Ruling 2002-62, which is on page 710 of Internal Revenue Bulletin 2002-42 at www.irs.gov/pub/irs-irbs/irb02-42.pdf.

Based on this info, I have a hard time seeing how your employer's choice of a retirement age that is earlier than the norm could alter the rules, unless you fall within the definition of a qualified public safety employee with a defined benefit plan. Or you are talking about a SEPP or an immediate annuity.

Letter rulings cannot provide exceptions to the law or change it, they can only clarify the law. You definitely want to see the letter ruling in any event.

Note that the information above is from an IRS publication, which is not legal precedent, but just the IRS's general explanation of how it thinks the tax code works. I did not go to the statute itself, so take the forgoing with the ever present grain of salt.

[Buckeye]

After reading everything and thinking about it, the only difference about our plan must be that payouts can start at age 50 instead of the "normal early" age of 55. This is what must have been reviewed and approved by the IRS.

The normal 72(t) rules must still apply but that portion of my question was not heard or understood by my HR guy. I think people assume that once you start taking money in retirement you will never stop. In this case, I would have to continue taking money for 10 years or face extra taxes.

[jazz4cash]

Buckeye...........sounds like you are in denial!

A long time ago, I read both short and long versions of our 401k plan (Summary Plan Description and Prospectus). It was time well spent. If your plan has such a provision, it should spelled out there in not so plain English.........but I still think its wrong. Have you asked the HR dept for a copy of that magical letter?

[Buckeye]

I think the response I got over at Fairmark confirms that 401(k) plans CAN be approved to start withdrawls at 50. The response also made it clear the 72t requirements apply and therefore I would have to to continue taking "substantially equal" withdrawls for 10 years whether I wanted the money or not or the 10% penalty would apply.

I will review the plan document and confirm what is in there but I don't think it's a stretch to assume I can start withdrawls at 50 but that I have to continue with the withdrawls until 59.5 (i.e 72(t) applies). It will be interesting to see whether the 72(t) requirements are even mentioned in the plan document since the requirement to continue taking payments is really in the 401(k) rules and not necessarily in our specific plan rules. The only thing our document may say is "we will let you begin taking your money out at 50" but it may neglect to mention that I better keep taking it out for 10 years or the IRS will come looking for more money.

[Buckeye]

I finally figured out the significance of my company having a normal retirement age of 50!

I went back and re-read the plan document. The key piece of information in there was that funds subject to vesting (profit sharing) vest immediately when the employee reaches retirement age (i.e. 50) and is eligible to retire.

I will turn 50 January 2009 so my "normal retirement date" as defined by the plan is 2/1/2009. This is important because my profit sharing would otherwise not be fully vested until 12/31/2010. I am not planning to stay with my current employer that long (boredom, DH's desire to return to Florida within the next 15 minutes) so I would have left a big bunch of money on the table by leaving early.

I don't really know the point of having the young normal retirement age in the plan as it specifically relates to the family-owned business I work in (they have all been there for many years) but it turns out to be worth a nice chunk of change to me. I wouldn't have put in the extra 2 years to achieve full vesting but I can manage the additional 5 months to get to 2/1/2009. Also, it makes no sense to resign prior to 1/1/2009 since I will receive my 2009 vacation, 2008 year-end bonus and 2008 profit sharing as of that date.