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"Rule of 55" question
Old 10-19-2021, 07:51 AM   #1
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"Rule of 55" question

I've seen conflicting information on the interwebs regarding The Rule of 55. Some articles have stated you're only eligible AFTER you turn 55, whereas others have stated IN THE YEAR you turn 55.

My birthday is May 1st. In the year I turn 55 (2025), could I, hypothetically, resign on 01/01/2025, take a withdrawal on Mar 1st, and not be penalized?

More than likely, I wouldn't take a withdrawal during that first year but want to make sure I'm OK for the years I turn 56-59.
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Old 10-19-2021, 07:55 AM   #2
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In the year you turn 55.

https://www.irahelp.com/slottreport/...ut-age-55-rule

Quote:
You must be age 55 or older in the year you separate from service. This rule can be tricky, if you separate from service prior to the year you reach age 55, you cannot use this exception. This is true even if you wait until the year you turn age 55 to take the distribution. It is your age in the year of separation from service that matters, not your age at the time of the distribution.
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Old 10-19-2021, 07:59 AM   #3
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Thanks @pb4uski! Also, my plan is the Thrift Savings Program. For those of you who are taking distributions directly from the plan, are you taxed 20% at the time of distribution or do you just report it as income at the end of the year and taxed appropriately?
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Old 10-19-2021, 08:50 AM   #4
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I posted this somewhere else here but too lazy to find it.

If your withdrawals are expected to last less than 10 years, withdrawals are taxed at 20%. If they're expected to last more than 10 years, taxes are based on W-4 . Could change from year to depending on the value of the holdings.

My first year, <10 years =20%
Second year, >10 years so now I have to pay quarterly estimates (market went up Considerably but my withdrawals stayed the same)
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Old 10-21-2021, 09:07 PM   #5
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Check with your employer. Even though the IRS says "in the year you turn 55", my Merrill Lynch 401(k) plan document said I had to resign after my 55th birthday to be eligible. Some 401(k) plans don't seem to support the Rule of 55. I worked through my 55th BD in January just to be sure, then gave the two months notice I had promised my boss, then FIREd on March 5.
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Old 10-21-2021, 09:37 PM   #6
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Quote:
Originally Posted by HI Bill View Post
Check with your employer. Even though the IRS says "in the year you turn 55", my Merrill Lynch 401(k) plan document said I had to resign after my 55th birthday to be eligible. Some 401(k) plans don't seem to support the Rule of 55. I worked through my 55th BD in January just to be sure, then gave the two months notice I had promised my boss, then FIREd on March 5.
From that Slott link:

Quote:
The age-55 exception is not an optional provision. Employer plans have a lot of flexibility when it comes to what provisions they offer. Just because the law allows some options, that does not necessarily mean that a plan will. However, some parts of the tax code are not optional. A plan cannot make the age-55 exception off limits if you are eligible.
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Old 10-21-2021, 09:39 PM   #7
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Quote:
Originally Posted by jimbohoward69 View Post
Thanks @pb4uski! Also, my plan is the Thrift Savings Program. For those of you who are taking distributions directly from the plan, are you taxed 20% at the time of distribution or do you just report it as income at the end of the year and taxed appropriately?
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Originally Posted by Lawrencewendall View Post
I posted this somewhere else here but too lazy to find it.

If your withdrawals are expected to last less than 10 years, withdrawals are taxed at 20%. If they're expected to last more than 10 years, taxes are based on W-4 . Could change from year to depending on the value of the holdings.

My first year, <10 years =20%
Second year, >10 years so now I have to pay quarterly estimates (market went up Considerably but my withdrawals stayed the same)
Be careful how you descrbe this... 20% refers to the amount of tax withheld... the tax that you actually end up paying on withdrawals could be more or less than 20% depending on other income sources, filing status, etc.
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Old 10-22-2021, 06:16 AM   #8
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Yeah, when I discovered this I was a little disappointed, because my birthday is in the first two weeks of the year, so it doesn't help me much at all! However, my spouse was born in the last two weeks of the same year, so at least we both qualify as of Jan. 1 of the same year.
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Old 10-22-2021, 09:30 AM   #9
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Check with your employer. Even though the IRS says "in the year you turn 55", my Merrill Lynch 401(k) plan document said I had to resign after my 55th birthday to be eligible. Some 401(k) plans don't seem to support the Rule of 55.
I'd suggest anyone who thinks the same should read their plan documents very carefully, because I thought that my Fidelity 401k plan said the same thing, but on closer reading it didn't. The wording was something like "if you retire after age 55 you can make withdrawals penalty-free, but before that you may owe a 10% penalty". On an initial cursory reading that sounded like the plan had the age 55 restriction, but really it was offering tax advice. And that advice was wrong(1) because it said "after age 55" instead of "in or after the year you reach age 55", which is the IRS's phrase (form 5329 instructions, line 2).

Now, it turns out the plan had other restrictions on withdrawals which made the rule of 55 withdrawals less attractive, but they were still possible for someone who retired "in or after the year you reach age 55".

(1) Technically not "wrong" because it said "may" - yay for weasel words.
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Old 10-22-2021, 10:14 AM   #10
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Originally Posted by HI Bill View Post
Check with your employer. Even though the IRS says "in the year you turn 55", my Merrill Lynch 401(k) plan document said I had to resign after my 55th birthday to be eligible. Some 401(k) plans don't seem to support the Rule of 55. I worked through my 55th BD in January just to be sure, then gave the two months notice I had promised my boss, then FIREd on March 5.
This ^^! As someone that was in the retirement admin biz, the plan document is gospel.
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Old 10-22-2021, 11:25 AM   #11
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^^^ Not always. See post#6.

Even in the case you quoted it isn't after the employee's 55th birthday... it is in the year that the employee turns 55... so if the employee's birthday is July 1 and the resign in January of the year they turn 55 then any withdrawals are penalty free since the tax code trumps the plan document in certain instances.

Quote:
The age-55 exception is not an optional provision. Employer plans have a lot of flexibility when it comes to what provisions they offer. Just because the law allows some options, that does not necessarily mean that a plan will. However, some parts of the tax code are not optional. A plan cannot make the age-55 exception off limits if you are eligible.
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Old 10-22-2021, 11:49 AM   #12
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Iím doing it now. Started in July 2020, the year in which I turned 55 later in the fall. DW did the same when she was still 54.
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Old 10-22-2021, 01:05 PM   #13
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Originally Posted by pb4uski View Post
^^^ Not always. See post#6.

Even in the case you quoted it isn't after the employee's 55th birthday... it is in the year that the employee turns 55... so if the employee's birthday is July 1 and the resign in January of the year they turn 55 then any withdrawals are penalty free since the tax code trumps the plan document in certain instances.
The plan may not allow you to do partial withdrawals if u terminate prior to age 55. That said, you could then take LS but they likely withhold the 10% penalty and you would need to get it back somehow.
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Old 10-22-2021, 01:27 PM   #14
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My SPD was saying you could only do the whole amount at age 55, I quit before 55 so moot for me.
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Old 10-23-2021, 07:34 AM   #15
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Check me on this but I think if you roll a 401k over to IRA, you will lose the rule of 55.

Just something to remember.
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Old 10-23-2021, 08:08 AM   #16
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Check me on this but I think if you roll a 401k over to IRA, you will lose the rule of 55.

Just something to remember.
That's correct. Also, rule of 55 only applies to the plan you were in when you ER'd. Does not apply to old plans that you may have been in with previous employers.
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Old 10-23-2021, 09:39 AM   #17
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That's correct. Also, rule of 55 only applies to the plan you were in when you ER'd. Does not apply to old plans that you may have been in with previous employers.

I always assumed that you could rollover old 401k plans to the current 401k that supports rule 55. I never looked to see if thatís true though.
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Old 10-23-2021, 10:18 AM   #18
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I always assumed that you could rollover old 401k plans to the current 401k that supports rule 55. I never looked to see if thatís true though.
I would assume that's possible but not sure. Follow up to that would be...will the plan allow ERA (55) withdrawals from the rollover source. I suspect they would.
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Old 10-23-2021, 07:51 PM   #19
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I always assumed that you could rollover old 401k plans to the current 401k that supports rule 55. I never looked to see if thatís true though.
This ^^^ works the last time I checked
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Old 10-24-2021, 03:00 PM   #20
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From that Slott link:
While it may not be an optional provision, that doesn't mean that all employer's 401(k) administrators follow the rule. A direct quote from my former employer's Merrill 401(k) plan follows: "You may also 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)." So, if you don't follow the plan's provisions explicitly, you may end up paying the 10% penalty, and I'm sure you could get the $ back when you file taxes.
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