Rule of 55 limitations/requirements

[The Cosmic Avenger]

OK, I did try to look this up, but it doesn't seem to be a common question, and I thought maybe someone here had experience with this situation. In short, can you retire before 55, then go back to work for that same employer part time for a very short time the year you turn 55 and then qualify for the Rule of 55? (Yes, I've confirmed that my plan does allow regular Rule of 55 penalty-free withdrawals.)

The reason I'm asking is that if we retire at, say, 53, the money we have in brokerage accounts might be stretched thin to get us to 59.5, and we think it would be better to save our Roth IRAs. We both have been consultants for decades, so we think our current employers and coworkers would welcome our expertise and it's not unheard of to step back into this kind of work like that. It would be nice to retire completely for 2 years, then go back for a bit part time. We could also start 72(t) withdrawals to avoid the 10% penalty, but then we can't change it until 59.5, so this would give us more flexibility. It might also allow us to spread out the tax hit more.

[Al18]

If you’re questioning whether you have enough at 53, then you don’t have enough.

[londo]

Bottom line is that you're going to have to declare to the IRS that you took a 401(k) distribution before age 59.5 and that you have a valid exception why you shouldn't pay a penalty. The list of exceptions (form 5329, line 2) includes "Qualified retirement plan distributions (doesn’t apply to IRAs) you receive after separation from service when the separation from service occurs in or after the year you reach age 55". If you think that applies to you then you're good. It doesn't say anything about separating and rejoining, full- or part-time employment.

[The Cosmic Avenger]

Quote:

Originally Posted by londo Bottom line is that you're going to have to declare to the IRS that you took a 401(k) distribution before age 59.5 and that you have a valid exception why you shouldn't pay a penalty. The list of exceptions (form 5329, line 2) includes "Qualified retirement plan distributions (doesn’t apply to IRAs) you receive after separation from service when the separation from service occurs in or after the year you reach age 55". If you think that applies to you then you're good. It doesn't say anything about separating and rejoining, full- or part-time employment.

Thanks, that's what I'm trying to figure out, what qualifies as a separation of service. If it's not spelled out, I suppose if I'm even zero hours on-call, which is what I've done when not working between contracts, then that might qualify, although if I can work at least a few hours in the year I turn 55 that would make me feel better.

[Montecfo]

Quote:

Originally Posted by The Cosmic Avenger Thanks, that's what I'm trying to figure out, what qualifies as a separation of service. If it's not spelled out, I suppose if I'm even zero hours on-call, which is what I've done when not working between contracts, then that might qualify, although if I can work at least a few hours in the year I turn 55 that would make me feel better.

Hi Cosmic Avenger,

The plan document (but maybe not the Summary Plan Description ) should spell this out, or refer you to ERISA definitions.

All the best.

[Aerides]

Quote:

Originally Posted by Al18 If you’re questioning whether you have enough at 53, then you don’t have enough.

Many people here make threads like this, and do have enough... They have enough at a macro level, but they don't have enough to get from 53 to 59.5 because too much of their savings is in their 401ks. You could have 10M in your 401k and expenses of 100k per year, but not be able to retire at 53 if you have also only 100k in taxable accounts, at least not without paying penalties which most of us would rather not do. It's a bucket problem. The sum of the buckets is fine, the allocations are off.

Now, I don't know much about the rule of 55 and it doesn't apply to me, but aside from that, these threads are a good reminder to everyone to have a balance with their savings to go to 59.5.

[Al18]

My comment was harsh, but I said it because I wouldn’t want anyone second guessing themselves after retiring too early. You’re close to 55 - best to keep working, even if it’s only part-time.

[The Cosmic Avenger]

Quote:

Originally Posted by Al18 My comment was harsh, but I said it because I wouldn’t want anyone second guessing themselves after retiring too early. You’re close to 55 - best to keep working, even if it’s only part-time.

Thanks for clarifying, as your concern didn't really come through the first time. My dad was a LBYM master, and I'm not so much concerned about having enough, as I know I could just spend my time at the library, volunteering more in my community, and doing other low-cost or free activities, but it probably won't come to that, I just want to make sure I'm tapping my accounts in the most advantageous way.

[Al18]

Age 55 also works well for most to get their 35 years of employment recorded to maximize their SS benefit.

[Alex The Great]

Not sure why anyone need to join the same employer, to enable 55 rule? Essentially you can join any employer which has 401K plan and transfer the old 401K into the current employer. I did it a few times. Then once you turn 55 years old the entire balance will be available with no penalty. The only challenge here is whether 401K plan allow partial distributions. If it does not then you are looking for high tax bill with limped sum distribution.

[JackJester]

Quote:

Originally Posted by Aerides Many people here make threads like this, and do have enough... They have enough at a macro level, but they don't have enough to get from 53 to 59.5 because too much of their savings is in their 401ks. .... these threads are a good reminder to everyone to have a balance with their savings to go to 59.5.

Excellent point Aerides. One of my first posts here was whether I could retire at 52. I had lots $ in my 401K, but little to none outside of that in savings or an after tax brokerage account. I didn't know I needed those extra buckets. Plus, by leaving at 52 I would have to fund my own health care on ACA to get to 65. But If I stayed with my employer and made it to 55 I had cheap early retiree medical coverage from megacorp to bridge the gap. And a SEPP 72t seemed like quite a hassle to deal with. So, I sucked it up. I started piling lots into a Schwab after tax account. And worked on building up savings in Ally. By the time I hit age 55 (1 yr ago) I was ready to pull the plug and FIRECalc gave me 100%. And since I have retired, my estimated expense are 15K higher than I thought I would need due to high inflation and more travel. So bottom line is I am glad I didn't retire before 55 even though I reaaaally wanted to. In addition, I saved enough that now I don't even need to keep my 401K in my weak megacorp 401K plan. The investment options were horrible (managed by Fidelity); I didn't even have an option for a MM fund or the ability to buy CDs or individual Bonds. So I rolled that 401K to a TIRA at Schwab. I lost my 55 Rule benefit, but I gained sooooo much better options to invest with and I can ride it out till 59.5.

[The Cosmic Avenger]

Quote:

Originally Posted by Alex The Great Not sure why anyone need to join the same employer, to enable 55 rule? Essentially you can join any employer which has 401K plan and transfer the old 401K into the current employer. I did it a few times. Then once you turn 55 years old the entire balance will be available with no penalty. The only challenge here is whether 401K plan allow partial distributions. If it does not then you are looking for high tax bill with limped sum distribution.

Sure, but as I mentioned, my employer and my co-workers seem to need my expertise in a few different areas on an ad hoc basis, and they kept me on an on-call basis for a while before when my previous contract ran out, plus then I wouldn't have to bother transferring anything.

Quote:

Originally Posted by Montecfo Hi Cosmic Avenger, The plan document (but maybe not the Summary Plan Description ) should spell this out, or refer you to ERISA definitions. All the best.

Thanks Montecfo, it sounds like my idea might work; if my current employer keeps me on-call, then I terminate that in the year I turn 55, I should qualify, but just to be safe I can probably work a few hours in that year.

Quote:

If you are an Employee of your Employer or a related employer at the time you attain your early retirement age of 55 and complete 5 years of service or you attain your normal retirement age of 60, to the extent that your Account is not already 100% vested it will automatically become 100% vested. You may take an early retirement distribution once you have satisfied the requirement(s) for early retirement, but you must first terminate your employment with your Employeror Related Employer.