Confirming Rule of 55

[pb4uski]

Another thank you for this thread. I've checked with my company and Fidelity and have yet to get a straight answer. In reading the SPD, I don't think it's available to me. My company said check with the administrator (Fidelity) and the two people I talked to were not sure. The second person surmised that since the SPD said I could keep my 401k within the plan after retirement, then it must be allowable. However, when I read the distribution rules, I see nothing that looks like the 55 rule. There's some things that look like 72t and an annuity, but not the ability to take periodic payments at 55. In fact, the age 55 never appears in the SPD. I'm going to have to escalate, but I'm not optimistic.

You might try this angle. Ask them if you leave service in the year that you turn 55 and take a partial distribution in that year, what will the coding be in box 7 of the 1099-R that they send you for that partial distribution.

Hopefully, they say "2-Early distribution, exception applies".

It mystifies me that company's can give employees a straight answer to rule of 55 queries.

 

[FI_RElater]

A question, please, texcurtis: My DW will meet her MRA+10 in 3.5 years. Do you find that accessing your TSP for spending cash is easy and flexible? Can you take what you want from it, when you want? Can you transfer funds electronically or are paper forms, humans and slow approvals involved? Thanks for the real world example. And congrats on your FIREing!

Nope-- the withdrawal rules for the TSP are VERY restrictive, hence the significant withdrawals from the plan at retirement. You can't take what you want, when you want; they take equally from BOTH regular and Roth TSP as you can't tell them to take only from regular TSP and let the Roth keep rising, and you get only two "whacks at the cat": first withdrawal upon retirement (if desired) and then only one more choice of among the three types ( full withdrawal, equal payments, or annuitization).

 

[supernova72]

this question is asked so often maybe it should be a sticky?

Good point. It does come up often. Earlier in the thread I posted the IRS Pub 575 that explains it. I've noticed lots of replies saying "check with your HR rep" which I don't think really applies here? Chao.

 

[pb4uski]

It sort of does apply to ask.

The language in Pub 575 suggests that the penalty does not apply to any 401k plan participants who make withdrawals after separating from service in the year they turn 55.

OTOH, my recolletion is similar to what DatumPoint5 posted in post#2... as I recall there was a Reagan-era tax law change that allowed penalty-free withdrawals for participants after separating from service in the year they turn 55 if the plan adopted certain changes and while many plans did... not all did... hence the need to ask.

The real important thing is how the plan will report it to the IRS because even if the plan allows penalty free withdrawals if they don't report it as code 2 then the burden of proof is on the taxpayer to prove that the penalty does not apply... if the plan reports it as code 2 then the taxpayer has clear sailing to avoid the penalty.

Of course, YMMV.

 

[Markola]

Nope-- the withdrawal rules for the TSP are VERY restrictive, hence the significant withdrawals from the plan at retirement. You can't take what you want, when you want; they take equally from BOTH regular and Roth TSP as you can't tell them to take only from regular TSP and let the Roth keep rising, and you get only two "whacks at the cat": first withdrawal upon retirement (if desired) and then only one more choice of among the three types ( full withdrawal, equal payments, or annuitization).

Thanks. Figures.

 

[2017ish]

My mega corp has a 20% mandatory withholding for taxes. Is that typical?

It's mandated by the IRS and/or the Code:

Any taxable distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll the distribution over later. If the distribution is rolled over, and you want to defer tax on the entire taxable portion, you will have to add funds from other sources equal to the amount withheld. You can choose to have your 401(k) plan transfer a distribution directly to another eligible plan or to an IRA. Under this option, no taxes are withheld.

https://www.irs.gov/retirement-plan...-plan-participants-general-distribution-rules

 

[Jerry1]

Mine was very clearly spelled out. It was in a section about hardship withdrawals. A search for the string "55" or "hardship" would have found the text on the first hit.

I would escalate to. Have you looked into a 72t?

It is not spelled out. It's certainly not one of the hardship options. I've thought about 72t, however I was more looking for flexibility between my current age (56) and turning 59-1/2.

Given those threads, my takeaway is not to "ask" HR. Instead "tell" HR you want your SPD. The company must provide the SPD when you request it. It is an ERISA law of some type that the EMPLOYER must make it available.

I have the SPD. The problem is the definitive answer. I'm a negotiator and contracting specialist. I can make the words in the SPD into being what I want, but they're not specifically there. Therefore, I think they are not and unfortunately this option is not available. Most concerning is that employer or Fidelity cannot definitively answer my question.

Mine was in a section by itself. The phrase "early retirement" was used in various sections of the SPD, but, 2 or 3 pages into the document, there was a single line of text that stated "Early retirement for the purposes used within this plan shall be considered the year in which the participant turns age 55".

Yeah - Nothing like that in mine.

 

[2017ish]

It is not spelled out. It's certainly not one of the hardship options. I've thought about 72t, however I was more looking for flexibility between my current age (56) and turning 59-1/2.

...

I have the SPD. The problem is the definitive answer. I'm a negotiator and contracting specialist. I can make the words in the SPD into being what I want, but they're not specifically there. Therefore, I think they are not and unfortunately this option is not available. Most concerning is that employer or Fidelity cannot definitively answer my question.

...

How big is your employer and/or how much influence do you have? I was able to get the language I wanted in the SPD after talking to my bosses about it. (I gave really long notice and they were willing to work with me on it.)

 

[Al18]

If you can't get a straight answer from your employer, or you don't want to alert your employer you are thinking of retiring, I would use a 72t distribution calculator such as this one from BankRate 72t Distribution Calculator

If the 72t calculator gives you the annual distribution you were looking for, then you're covered. Simplest case - you can take distributions from your 401k in the year you turn 55. Or you can't get the distribution from your 401k, so you roll it over to an IRA and take equal yearly distributions for at least 5 years or until you're 59 1/2.

 

[texcurtis]

Nope-- the withdrawal rules for the TSP are VERY restrictive, hence the significant withdrawals from the plan at retirement. You can't take what you want, when you want; they take equally from BOTH regular and Roth TSP as you can't tell them to take only from regular TSP and let the Roth keep rising, and you get only two "whacks at the cat": first withdrawal upon retirement (if desired) and then only one more choice of among the three types ( full withdrawal, equal payments, or annuitization).

I would explain TSP withdrawal options a bit differently. You can have a one time withdrawals. Additionally, you can determine a monthly withdrawal amount (which can be changed yearly). You don't have to have equal payments forever or do an annuity, you can change your monthly withdrawal amount once a year.

 

[Markola]

I would explain TSP withdrawal options a bit differently. You can have a one time withdrawals. Additionally, you can determine a monthly withdrawal amount (which can be changed yearly). You don't have to have equal payments forever or do an annuity, you can change your monthly withdrawal amount once a year.

That sounds more reasonable. Thanks.

 

[CRLLS]

It is not spelled out. It's certainly not one of the hardship options. I've thought about 72t, however I was more looking for flexibility between my current age (56) and turning 59-1/2.




I have the SPD. The problem is the definitive answer. I'm a negotiator and contracting specialist. I can make the words in the SPD into being what I want, but they're not specifically there. Therefore, I think they are not and unfortunately this option is not available. Most concerning is that employer or Fidelity cannot definitively answer my question.


Yeah - Nothing like that in mine.

If you are fluent in contracts, it might make sense to get a full copy of the plan. The SPD is not the document they use. It is just a layman's term version with a lot missing, hence the term SUMMARY. I treat it like Cliff Notes version, OR a big yellow book titled "Pensions for Dummies". When I left one mega some years back, I requested the complete plan. I had to pay something like 10 cents per page on a multi-100 page plan for my copy. I thought it was well worth the money spent to KNOW what I was basing my plans for 20 year in the future on. It might be worth the expense for you.