Confirming Rule of 55

[mbnj77]

Hey all, I know there have been plenty of threads about the Rule of 55 but there are a ton of responses and other sources I have seen on the web that all say you can withdraw from a qualified plan (401k, not IRA), when you are separated from the employer who holds the plan, when you are 55.

Bu the IRS says it differently. It says you can take penalty free withdrawals in the year you turn 55.

Has anyone else been confused by this? My birthday is in September and I would much rather go January 2nd instead if it was anyway possible.

Has anyone left when they were 54 but their B-Day was later in the year?

Thanks.

 

[DatumPoint5]

The "55 rule" is plan specific. It was made available through changes in the law, but, each company had to decide if they wanted to adopt it into their 401K plans. You need to ensure the SPD (Summary Plan Description) of your 401K plan specifically has a statement that qualifies the verbiage "early retirement" to mean "starting at age 55".
And yes, the IRS says "in the year you turn 55" which means you could be 54 in January, turn 55 in December, but, still start your withdrawals anytime that year. Also, if the rule is in your SPD, anytime after the year in which you turn 55, you can begin withdrawals.

 

[MRG]

The "55 rule" is plan specific. It was made available through changes in the law, but, each company had to decide if they wanted to adopt it into their 401K plans. You need to ensure the SPD (Summary Plan Description) of your 401K plan specifically has a statement that qualifies the verbiage "early retirement" to mean "starting at age 55".
And yes, the IRS says "in the year you turn 55" which means you could be 54 in January, turn 55 in December, but, still start your withdrawals anytime that year. Also, if the rule is in your SPD, anytime after the year in which you turn 55, you can begin withdrawals.

+1
Also ensure the plan allows for periodic withdrawals, some don't.

 

[SevenUp]

Note that 26 U.S. Code §72(t)(2)(A)(v) says "made to an employee after separation from service after attainment of age 55", but the IRS says in http://www.irs.gov/pub/irs-pdf/p575.pdf "after your separation from service in or after the year you reached age 55".

One could perhaps sue the IRS for being too generous in its interpretation of the US Code, but I don't see that happening any time soon.

 

[GravitySucks]

Has anyone left when they were 54 but their B-Day was later in the year?<br />
<br />
Thanks.
Yes I did. In March 2013 I left at 54 and turned 55 in Sept.

Check and double check your SPD

 

[supernova72]

True story and from my limited experience in ER one of the most mis-understood rules. If I had a nickel for each time someone said "you can't take withdrawals until you are 59.5" I could have retired 10 years ago. Ha.

It's in IRS Pub 575 down on page 34.

https://www.irs.gov/pub/irs-pdf/p575.pdf

"Separation from service. In order to meet the re- quirements for the first exception in the list above, you must have separated from service in or after the year in which you reach age 55 (or age 50 for qualified public safety employees). You can’t separate from service be- fore that year, wait until you are age 55 (or age 50 for qualified public safety employees), and take a distribution."

 

[pb4uski]

Lot's of details for the OP to sort through. Does his plan allow? (most likely yes). If so, does plan allow partial withdrawals? (hopefully yes, because if not that is a problem).

Another thing to ask about is.... if I separate from service at age 54 but in the calandar year that I turn 55 and do a partial withdrawal, what code will you use in box 7 of the 1099-R?

Hopefully, they say "2-Early distribution, exception applies" bur if they don't the burden will be on you to demonstrate that the penalty should not apply if the IRS comes asking.

 

[CRLLS]

If the OP's plan doesn't allow for either partial withdrawals OR pre age 55 (birthday), couldn't he just roll the 401K over into an IRA and start 72T withdrawals at any age?

 

[pb4uski]

Yes, but 72T comes with its own set of restrictions.

 

[Markola]

See? This is why I read the ER Forum. My plan until tonight was to semi retire in January 2021, right after I turn 55 at the end of December, 2020, just as my plan's rules allow. Thanks to this post, I have a new question for the 403b administrators, which is to verify that I'm eligible ONE FULL YEAR before, i.e if I separate from service in January, 2020 - the year I turn 55. That seems entirely possible based on my prior readings and conversations with them. You guys/gals' closer reading of the rules than my own, plus my parents' excellent, eh, "timing", just saved me nearly a year off the time until I can semi-FIRE penalty-free.

 

[texcurtis]

I retired on Feb 1 and was 54. I turned 55 in April and have access to my TSP (govt 401K) without penalty.

 

[Al18]

My birthday is near the end of the year, and for years I was planning on retiring the Spring when I was 54. This Spring was the time, but I didn't retire. I would rather see my investable assets grow another 9% and I'll retire next spring.

 

[pb4uski]

If the objective was to grow investment assets then nobody would retire.

 

[Jerry1]

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.

 

[RobLJ]

In my 403b plan (in Texas), I had to satisfy the "rule of 80" (age + years of service = 80 or higher). In my case, I would have qualified at 55, but I waited until 57.

See? This is why I read the ER Forum. My plan until tonight was to semi retire in January 2021, right after I turn 55 at the end of December, 2020, just as my plan's rules allow. Thanks to this post, I have a new question for the 403b administrators, which is to verify that I'm eligible ONE FULL YEAR before, i.e if I separate from service in January, 2020 - the year I turn 55. That seems entirely possible based on my prior readings and conversations with them. You guys/gals' closer reading of the rules than my own, plus my parents' excellent, eh, "timing", just saved me nearly a year off the time until I can semi-FIRE penalty-free.

 

[RobLJ]

Check with the HR person in charge of administrating the plan.

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.

 

[Markola]

I retired on Feb 1 and was 54. I turned 55 in April and have access to my TSP (govt 401K) without penalty.

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!

 

[MRG]

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.

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?

 

[DatumPoint5]

Check with the HR person in charge of administrating the plan.

Somewhere on this forum is one or two threads about this issue. In those threads, an initial inquiry to HR about the rule of 55 was dismissed as "not possible". Subsequently, the OP was able to prevail and "educated HR". The OP successfully obtained the SPD, and the reference to "55" was contained within the plan.

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.

IN case your HR does not believe they need to supply it to you, point them at this web link.

ERISA SPD Delivery Electronic Distribution Requirements

 

[DatumPoint5]

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".

 

[SevenUp]

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.

Note the difference between the IRS not imposing a penalty for withdrawals, vs. your company allowing (or not) partial withdrawals, when you leave that company in or after the year you turn 55.

 

[Big_Hitter]

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

 

[Carpediem]

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

 

[MRG]

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

Mine did too. I believe that is fairly typical.

 

[Just_Steve]

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

Mine also.