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Another article about the 'rule of 55'...
Old 09-18-2020, 06:49 PM   #1
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Another article about the 'rule of 55'...

Yesterday MSN posted this article: (from Business Insider)
https://www.msn.com/en-us/money/reti...8R7?li=BBnbfcN

It mentioned that one has to wait until they turn 55 while I thought the IRS publications stated one was eligible on January 1st the year they turned 55.

It also mentions only being able to use your current employer 401(k) and of course, only after 'separation from service' from said employer.

My birthday is at the end of the year so for me there's 11 months difference.

I started a previous thread...
https://www.early-retirement.org/for...ot-104535.html
...about rolling over a Vanguard 401(k) from a previous employer into my current employer's JH 401(k) and the responses leaned heavily towards "Don't Do It!"
Any thoughts or suggestions about the article and the best way to go about retiring at age 54?
Thanks in advance for any insight.
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Old 09-18-2020, 06:58 PM   #2
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I skimmed the article. Anything that takes too many words to explain something is a red flag to me. The article raised a red flag because it didn't get to the point fast enough, or clearly enough.

Send an email to your 401k administrator (Vanguard, Fidelity, Mass Mutual, whichever is the case) and ask the question. They will know. If you are still employed, ask your benefits manager. He/she will know.

Also read about "Section 72t". This is an IRS provision allowing early withdrawal of retirement assets with no penalty, but there are stipulations. And there is ordinary income tax, as always.
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Old 09-18-2020, 10:34 PM   #3
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I didn't read the article. MSN and other websites like it are not the highest quality source of information, and they frequently get things wrong.

If the article says you have to wait until you actually turn 55, then the article is wrong. Here are the IRS' own words:

"The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

1. Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55...."

-- https://www.irs.gov/taxtopics/tc558

There is also no mention that it only can be your current employer in the IRS web page above. The way I read the rules it could be any former employer's 401(k).

I do think the part about separating from service is typically true, although that would be a restriction put in place by a particular employer's 401(k), not an IRS regulation.

...

Now whether you should retire at 54 is another question. I'd say if you want to, you know your expenses, have 25x saved up, and your partner (if any) is supportive, then you probably have a very good case for retiring.
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Old 09-18-2020, 11:07 PM   #4
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There is also no mention that it only can be your current employer in the IRS web page above. The way I read the rules it could be any former employer's 401(k).

How do you figure? As you say:


Quote:
Originally Posted by SecondCor521 View Post
Here are the IRS' own words:

"The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

1. Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55...."

-- https://www.irs.gov/taxtopics/tc558
(Emphasis added)
So, are you pointing out that one could work for Megacorp A for 20 years, stop working there at age 54 (but in the year that you will turn 55), then work for a few months for Megacorp B, and then retire. And now you are eligible to draw penalty-free from Megacorp A's 401k. Is the point you are making is that you are eligible to draw from MC A's 401k, even though it has not been your "current employer" for 4-ish months?

If so, I would agree with you, but it seems to be an unlikely set of circumstances. IMHO, even if "current employer" is not strictly correct, it confers little ambiguity for 99.9% of the cases.
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Old 09-18-2020, 11:44 PM   #5
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Originally Posted by Out-to-Lunch View Post
So, are you pointing out that one could work for Megacorp A for 20 years, stop working there at age 54 (but in the year that you will turn 55), then work for a few months for Megacorp B, and then retire. And now you are eligible to draw penalty-free from Megacorp A's 401k. Is the point you are making is that you are eligible to draw from MC A's 401k, even though it has not been your "current employer" for 4-ish months?

If so, I would agree with you, but it seems to be an unlikely set of circumstances. IMHO, even if "current employer" is not strictly correct, it confers little ambiguity for 99.9% of the cases.

DH worked for Megacorp A, retired in the year he turned 55, and before he retired he did a direct rollover from his Megacorp B's 401K into Megacorp A's 401k plan. If I remember correctly, Megacorp B's plan rules did not allow him to take periodic withdrawals as a former employee.
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Old 09-18-2020, 11:57 PM   #6
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How do you figure? As you say:




So, are you pointing out that one could work for Megacorp A for 20 years, stop working there at age 54 (but in the year that you will turn 55), then work for a few months for Megacorp B, and then retire. And now you are eligible to draw penalty-free from Megacorp A's 401k. Is the point you are making is that you are eligible to draw from MC A's 401k, even though it has not been your "current employer" for 4-ish months?

If so, I would agree with you, but it seems to be an unlikely set of circumstances. IMHO, even if "current employer" is not strictly correct, it confers little ambiguity for 99.9% of the cases.
My points were merely attempting to correct two different things where the OP's representations of the article didn't line up with IRS rules. In order to get to your term "unlikely", I think you may be conflating the "retire in the year in which one is 55" with the "more than one employer". I didn't do or say that, and neither does the IRS.

A more plausible scenario is that a person retires from company A after age 55, then decides for whatever reason (not enough money, bored, annoying their spouse) to go to work for company B for a few years, then retires at age 57 from company B. They could then pull from either A's 401(k) or B's 401(k) without penalty.

Yes, it's still not very likely, but saying "current employer" does generate additional limitations which are simply not there in the IRS rules. If someone meets all the actual IRS requirements but thinks that the "current employer" is also a rule but doesn't meet it, I would think that to be an unfortunate situation because they might be working when they don't want to or need to.
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Old 09-19-2020, 06:46 AM   #7
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My points were merely attempting to correct two different things where the OP's representations of the article didn't line up with IRS rules. In order to get to your term "unlikely", I think you may be conflating the "retire in the year in which one is 55" with the "more than one employer". I didn't do or say that, and neither does the IRS.
OP here...
For clarification, I left my previous employer (due to moving to a new location) 10 years ago but kept the 401(k) funds in place since it was with Vanguard and had a good selection of funds with low expense ratios. I also have a Roth IRA and a taxable account with Vanguard so approximately 75% of my savings are with Vanguard.
My current employer 401(k) is with John Hancock (JH) and I have a similar allocation to my Vanguard 401(k) but with somewhat higher expenses. I will turn 55 at the end of 2025 and should have more than 25X my annual expenditures saved. (actually already there with about 30X but I like my job - to an extent - and want to keep busy for another 4-1/2 years or so)
From what I've been able to determine, my current employer's JH 401(k) plan does not allow periodic distributions upon retirement. But I'm not sure. They told me they thought it would be a lump-sum distribution but they weren't 100% positive. There's another intermediate between my employer and JH and I attended a meeting about retirement planning with them but nobody seemed to have any definite answers.
I felt like a clown at a circus.
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Old 09-19-2020, 08:59 AM   #8
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If the article says you have to wait until you actually turn 55, then the article is wrong.
read the SPD/Plan document and call HR if there is any question
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Old 09-19-2020, 09:25 AM   #9
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Yep, going to the plan document is the sure way. That's what I did when I was resigning at age 55.
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read the SPD/Plan document and call HR if there is any question
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Old 09-19-2020, 09:48 AM   #10
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Yep, going to the plan document is the sure way. That's what I did when I was resigning at age 55.
I guess my employer isn't "mega" enough. I went to the JH website but they don't list any type of plan document. Ditto for my "employee portal" where I can view corporate information. There's a lot about the profit sharing plan but that doesn't address distributions or retirement. Only contributions. They do have a "retirement plan" section but it's not very specific.
(links disabled)
Retirement Plan:

Investment Policy Statement
Goal Setting
Participant Website Guide
IBEW LUXXXX Transaction Fees


Life Insurance Plan:

Life Group Benefits

Retirement Financial Education:

Retirement Plan Consulting
Bear Markets Shouldn't Scare You
Take the Emotion out of Investing
What Loans Cost
Keep Contributing Through Market Ups and Downs
When Markets Are Down, Stay the Course
How To Set A Goal


Under the "Retirement Plan Consulting" link there's a phone number and e-mail address for a 'consultant' from the intermediate between my company and JH but she's the same clown who couldn't tell me about distributions when I asked. Our HR department is a joke as well. We have a CFO but he always defers my questions to the intermediate clowns.
Oh, well. I guess I have 4+ years to work things out.
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Old 09-19-2020, 09:49 AM   #11
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^ look for the SPD - summary plan description
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Old 09-19-2020, 09:54 AM   #12
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^ look for the SPD - summary plan description
I did find a link to a "SPD" under the profit sharing section rather than the retirement plan section. It was buried and not easy to find.
Thanks.
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Old 09-19-2020, 09:55 AM   #13
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Originally Posted by ArmchairMillionaire23 View Post
I did find a link to a "SPD" under the profit sharing section.
Thanks.
"From what I've been able to determine, my current employer's JH 401(k) plan does not allow periodic distributions upon retirement. But I'm not sure. They told me they thought it would be a lump-sum distribution but they weren't 100% positive. "

good! hopefully you will find the answer to this ^^^
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Old 09-19-2020, 10:07 AM   #14
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Originally Posted by ArmchairMillionaire23 View Post
OP here...
From what I've been able to determine, my current employer's JH 401(k) plan does not allow periodic distributions upon retirement. But I'm not sure. They told me they thought it would be a lump-sum distribution but they weren't 100% positive. There's another intermediate between my employer and JH and I attended a meeting about retirement planning with them but nobody seemed to have any definite answers.
I felt like a clown at a circus.

You need to be persistent in following up and getting a definite answer about how the distributions work in this 401k plan.

The key is, you need to be able to access enough money to get you from age 54.x to 59.5 when you can access the rest of your retirement funds. The ideal is if it turns out you can make periodic withdrawals from the 401k. Whereas, if you can only take a lump-sum, then you will likely be forced into a huge distribution which would put you in a very high tax bracket.

*IF* you have to take the lump sum distribution, another question is, can the distribution be split into one portion that you simply withdraw and another portion that is sent directly to an IRA so you don't have to pay taxes on it? For example, suppose you will have $500k in your current employer's 401k at that time, but you only project needing a total of $350k of expenses over the 5 years from age 54.x to 59.5. Ideally, you only want to pay taxes on $350k in the year of the lump-sum distribution, with the other $150k rolled into an IRA.

If it turns out that you will have to take the whole $500k (in the above example) in a lump sum that you have to pay taxes on in one year, then, since you have another 5 years to invest your money until then, you should probably consider stopping contributions into your 401k. People invest in a 401k to lower their taxes; but in your case, you would be increasing yours by being thrown into the high tax bracket. Do you have a Roth option available in your 401k? Or just invest as much as you can in a Roth IRA. When those options are exhausted, take the rest of the money as normal income after you have paid taxes and invest that.

But you really need to know how the 401k distribution rules work to decide the best plan.
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Old 09-19-2020, 10:14 AM   #15
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But you really need to know how the 401k distribution rules work to decide the best plan.
Here's what I just found out concerning what the company deems "early retirement":

What happens if I terminate employment at Early Retirement Date?
Early Retirement Date. Your Early Retirement Date is the date you have attained age 55 and completed 7 Years of Service with your
Employer (early retirement age). Your Years of Service will be determined using Years of Service for vesting. You may elect to retire
when you reach your Early Retirement Date.
Payment of benefits. If you are employed on the date you attain your early retirement age, you will become 100% vested in all of
your accounts under the Plan. However, the payment of benefits generally will not begin until you actually retire after reaching your
Early Retirement Date. In such event, a distribution will be made, at your election, as soon as administratively feasible. However, if
you retire after reaching your Early Retirement Date but prior to your Normal Retirement Date and the value of your account balance
does not exceed $1,000, then a distribution of your account balance will be made to you, regardless of whether you consent to
receive it. (See the question entitled "How will my benefits be paid to me?" for an explanation of how these benefits will be paid.)

How will my benefits be paid to me?
Forms of distribution. If your vested account balance does not exceed $5,000, then your vested account balance may only be
distributed to you in a single lump-sum payment. In determining whether your vested account balance exceeds the $5,000 threshold,
"rollover" contributions (and any earnings allocable to "rollover" contributions) will be taken into account.
In addition, if your vested account balance exceeds $1,000, you must consent to any distribution before it may be made. If your
vested account balance exceeds $5,000, you may elect to receive a distribution of your vested account balance in:
 a single lump-sum payment
 partial withdrawals of at least $5,000
Delaying distributions. You may delay the distribution of your vested account balance unless a distribution is required to be made,
as explained earlier, because your vested account balance does not exceed $1,000.
Medium of payment. Benefits under the Plan will generally be paid to you in cash or in property.

So I guess I have to wait until the end of 2025 when I actually turn 55 if I want to take penalty-free distributions from my JH account.
Bummer.
But at least I can plan on being able to take periodic distributions for those 4-1/2 years from 55 to 59-1/2.

Thanks for everyone's help.
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Old 09-19-2020, 11:09 AM   #16
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Originally Posted by ArmchairMillionaire23 View Post
Here's what I just found out concerning what the company deems "early retirement":

What happens if I terminate employment at Early Retirement Date?
Early Retirement Date. Your Early Retirement Date is the date you have attained age 55 and completed 7 Years of Service with your
Employer (early retirement age). Your Years of Service will be determined using Years of Service for vesting. You may elect to retire
when you reach your Early Retirement Date.
Payment of benefits. If you are employed on the date you attain your early retirement age, you will become 100% vested in all of
your accounts under the Plan. However, the payment of benefits generally will not begin until you actually retire after reaching your
Early Retirement Date. In such event, a distribution will be made, at your election, as soon as administratively feasible. However, if
you retire after reaching your Early Retirement Date but prior to your Normal Retirement Date and the value of your account balance
does not exceed $1,000, then a distribution of your account balance will be made to you, regardless of whether you consent to
receive it. (See the question entitled "How will my benefits be paid to me?" for an explanation of how these benefits will be paid.)

How will my benefits be paid to me?
Forms of distribution. If your vested account balance does not exceed $5,000, then your vested account balance may only be
distributed to you in a single lump-sum payment. In determining whether your vested account balance exceeds the $5,000 threshold,
"rollover" contributions (and any earnings allocable to "rollover" contributions) will be taken into account.
In addition, if your vested account balance exceeds $1,000, you must consent to any distribution before it may be made. If your
vested account balance exceeds $5,000, you may elect to receive a distribution of your vested account balance in:
 a single lump-sum payment
 partial withdrawals of at least $5,000
Delaying distributions. You may delay the distribution of your vested account balance unless a distribution is required to be made,
as explained earlier, because your vested account balance does not exceed $1,000.
Medium of payment. Benefits under the Plan will generally be paid to you in cash or in property.

So I guess I have to wait until the end of 2025 when I actually turn 55 if I want to take penalty-free distributions from my JH account.
Bummer.
But at least I can plan on being able to take periodic distributions for those 4-1/2 years from 55 to 59-1/2.

Thanks for everyone's help.
I'm not sure I understand what they mean by some of this. I generally understand the word "vesting" as applying to company-match funds (since you can always roll over your own 401k funds when you leave a company, regardless of age or years of service). Some companies will only allow you to keep company-match funds after you work for the company for a certain number of years, aka "vesting". But generally, once you work for that number of years, you are vested no matter what age you are. But they say, "If you are employed on the date you attain your early retirement age [i.e. 55], you will become 100% vested in all of your accounts under the Plan." They don't appear to say whether someone who leaves the company after the 7 years of work but before age 55 will ever be considered vested. Does that mean that someone who leaves the company after working for 7 years but at, for example, age 30 or 40, will never be vested since they won't be employed by the company when they turn 55? So they will lose the company match funds? If that's what they mean, that is different than any 401k plan I have ever heard of. But maybe I don't understand what they are trying to say in this regard in the paragraphs you quoted.

If you want to retire at age 54, ideally you could do so as long as you have enough non-401k funds to pay your expenses for that one year from age 54 to 55. You could probably accomplish that by slowing down or stopping your 401k contributions for the next 4 years and contribute to a Roth IRA instead, and/or just invest the money after you have paid normal taxes. Use those funds to live on for the 1 year, then when you reach age 55, start withdrawing your 401k funds. But you need to make sure that if you do this, you won't lose company-match funds altogether if you weren't considered vested due to leaving the company prior to age 55.
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Old 09-19-2020, 12:48 PM   #17
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So I guess I have to wait until the end of 2025 when I actually turn 55 if I want to take penalty-free distributions from my JH account.
Bummer.
But at least I can plan on being able to take periodic distributions for those 4-1/2 years from 55 to 59-1/2.

Thanks for everyone's help.
that's why I waited to quit my j*b until I attained 55
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Old 09-19-2020, 01:01 PM   #18
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If you want to retire at age 54, ideally you could do so as long as you have enough non-401k funds to pay your expenses for that one year from age 54 to 55. You could probably accomplish that by slowing down or stopping your 401k contributions for the next 4 years and contribute to a Roth IRA instead, and/or just invest the money after you have paid normal taxes. Use those funds to live on for the 1 year, then when you reach age 55, start withdrawing your 401k funds. But you need to make sure that if you do this, you won't lose company-match funds altogether if you weren't considered vested due to leaving the company prior to age 55.
Since we paid off the house and have no vehicle payments, I'm already maxing out my Roth IRA and my 401(k) contributions. It's a little more than I'm used to contributing since 2020 is the year I will turn 50 so I get to contribute more from now on. I'm also maxing out my wife's traditional IRA as well as my HSA account. I still haven't decided exactly how I'm going to utilize my Roth account once I stop working but that's something I'll be working on from now until 2025 as I finalize my retirement planning.
As far as the whole "vesting" thing goes, the company is quite generous with the profit sharing as they contribute up to 12% of my yearly pay into the 401(k) every year no matter how much I contribute. (There's a 'safe harbor' contribution of 3% and up to another 9% based on how profitable the company was the previous fiscal year) But I've been employed there well over the 7-years it takes to become 'fully vested' so the amount in my account is 100% mine, minus Uncle Sam's cut, that is.
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Old 09-19-2020, 01:16 PM   #19
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I still haven't decided exactly how I'm going to utilize my Roth account once I stop working but that's something I'll be working on from now until 2025 as I finalize my retirement planning.
IMO you have your priorities straight - focus on hitting your number then you can figure out how to draw it down
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Old 09-19-2020, 09:55 PM   #20
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My points were merely attempting to correct two different things where the OP's representations of the article didn't line up with IRS rules. In order to get to your term "unlikely", I think you may be conflating the "retire in the year in which one is 55" with the "more than one employer". I didn't do or say that, and neither does the IRS.

A more plausible scenario is that a person retires from company A after age 55, then decides for whatever reason (not enough money, bored, annoying their spouse) to go to work for company B for a few years, then retires at age 57 from company B. They could then pull from either A's 401(k) or B's 401(k) without penalty.

Yes, it's still not very likely, but saying "current employer" does generate additional limitations which are simply not there in the IRS rules. If someone meets all the actual IRS requirements but thinks that the "current employer" is also a rule but doesn't meet it, I would think that to be an unfortunate situation because they might be working when they don't want to or need to.

Yes, I think you are right, and I see your point now. Thank you for explaining. I will likewise explain my thinking because I do think your (and perhaps) my impressions may be useful to others on this topic. I will explain in a moment what threw me about your response. I note that your more plausible scenario is essentially the same as mine, but I restricted the "second retirement" to occur in the year one turned 55 because that is what I thought you were claiming. This is why I thought it was "unlikely."

The thing that threw me was your statement that "The way I read the rules it could be any former employer's 401(k)." Of course, it can only be any former 401(k) that was active when you separated service at 55 or later. It is now clear to me that you know that, but when I read that line I thought you meant ANY former employer, period. Like, the one you left when you were 33, for example.

So my suspicion is that the imprecise/incorrect statements commonly made about "your current employer" are to prevent people from thinking that once they are 55 they can tap that 401(k) from 15 years ago. Your clarification is valuable to disabuse us of this. Personally, I worry more about people thinking they can tap an old account (from before they were 55) than about people thinking they cannot tap a slightly old account between 55 and 59.5.
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