PSA: Read your 401k Summary Plan Document (rule of 55)

[corn18]

I plan to retire right after I turn 55. But I was thinking about retiring in the year I turn 55 but before I am 55. I called Fidelity who manages my 401k and asked them about the rule of 55 and they said I was good to go. The plan allows withdrawals. But I never specifically asked if it meant the year I turned 55 or after I turned 55. While the IRS rules have been interpreted to mean the rule of 55 applies to the year in which you turn 55 (although there is still some debate on this), I just read the Summary Plan Document (SPD) for my 401k and on page 67 it specifically states that I have to be 55 to start withdrawals prior to 59 1/2. Glad I didn't decide to try and retire in Jan of this year when I turn 55 in Mar.

 

[Lcountz]

Page SIXTY SEVEN?!?!?!?!?


I suppose it was in microscopic print too?

 

[corn18]

Page SIXTY SEVEN?!?!?!?!?


I suppose it was in microscopic print too?

It was so boring to read. Fell asleep a couple of times reading it.

 

[jimbee]

Also make sure the allowed withdrawals are periodic, and not "all or nuthin'". My 401k flip-flopped at least two time on that starting the year before I retired. HR didn't mention it in their "informational update meetings" either. Retiree beware.

 

[londo]

While the IRS rules have been interpreted to mean the rule of 55 applies to the year in which you turn 55 (although there is still some debate on this),

What debate is there? The IRS rules specifically say that the additional tax on early distributions doesn’t apply when "the separation from service occurs in
or after the year you reach age 55". I'm having trouble coming up with a different interpretation to debate.

 

[corn18]

What debate is there? The IRS rules specifically say that the additional tax on early distributions doesn’t apply when "the separation from service occurs in
or after the year you reach age 55". I'm having trouble coming up with a different interpretation to debate.

There have been threads on bogleheads arguing about the rule. I can never figure out how someone could interpret it any other way than what you or I do, but somehow they manage to. I dismissed the counter argument long ago and concluded I can take withdrawals without penalty in the year I turn 55, as far as the IRS was concerned. The next step was to figure out if my plan allowed it, which it does. Including partial withdrawals. Yeah me!

 

[pb4uski]

I plan to retire right after I turn 55. But I was thinking about retiring in the year I turn 55 but before I am 55. I called Fidelity who manages my 401k and asked them about the rule of 55 and they said I was good to go. The plan allows withdrawals. But I never specifically asked if it meant the year I turned 55 or after I turned 55. While the IRS rules have been interpreted to mean the rule of 55 applies to the year in which you turn 55 (although there is still some debate on this), I just read the Summary Plan Document (SPD) for my 401k and on page 67 it specifically states that I have to be 55 to start withdrawals prior to 59 1/2. Glad I didn't decide to try and retire in Jan of this year when I turn 55 in Mar.

You may want to ask your employer and plan administrator for an explanation of the wording in the SPD compared to the IRS wording (which clearly say in the year that you turn 55). If they say the SPD is right then that is what it is but they may say that you are misinterpreting the SPD.

Also make sure the allowed withdrawals are periodic, and not "all or nuthin'". My 401k flip-flopped at least two time on that starting the year before I retired. HR didn't mention it in their "informational update meetings" either. Retiree beware.

+1 some posters have been caught up on this... they were allowed penalty free withdrawals but the withdrawal rules were unworkable... like no partial withdrawals were allowed.

 

[Out-to-Lunch]

+1 some posters have been caught up on this... they were allowed penalty free withdrawals but the withdrawal rules were unworkable... like no partial withdrawals were allowed.

Yeah, our good friend is caught out by this: You can take a distribution at 55, but only a total distribution! Roll that into an IRA, and you are stuck, or take it all in cash, and you are paying gonzo taxes... (yes, yes, she can do 72t, but that is another discussion).

 

[pb4uski]

Could she roll x% of it into an IRA (what she does not need for 55-59 1/2) and then do a single no-penalty withdrawal of the remainder? Still not great but better than a total distribution.

 

[Out-to-Lunch]

Could she roll x% of it into an IRA (what she does not need for 55-59 1/2) and then do a single no-penalty withdrawal of the remainder? Still not great but better than a total distribution.

Yeah, that is probably her best bet. Thanks for the comment/suggestion.

I have worked on the details with her a bit, but we are far from converging. She has a few years to go yet, and, honestly, she doesn't quite accept that she is underfunded...

 

[tmm99]

Yeah, our good friend is caught out by this: You can take a distribution at 55, but only a total distribution! Roll that into an IRA, and you are stuck, or take it all in cash, and you are paying gonzo taxes... (yes, yes, she can do 72t, but that is another discussion).

Damn, that sounds awful. I would have been so screwed. I retired at Age 56 and have been taking partial distributions from my 401K ever since. One thing that may be unique to my 401K is that you cannot choose which funds to take the distribution from. It comes out equally (in the same proportion) across all funds.

 

[HI Bill]

My current 401(k) plan is with Merrill Lynch. There's footnote in the company retirement savings plan (RSP) document that states: "You may be subject to a 10% additional federal tax if you take a withdrawal before age 59 1/2 (does not apply if you separate from service on or after age 55). I agree that this does not exactly comply with the IRS "Rule of 55", but I deferred my ER until after my 55th birthday, just to be safe.