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Rule of 55 Roth withdrawal ?'s
Old 08-02-2020, 03:50 AM   #1
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Rule of 55 Roth withdrawal ?'s

I'm 56 and plan to use the Rule of 55 to access my 401K money after I retire Nov. 2. In the 401K I opened a Roth account in 2019. Outside of the 401K I have had a Roth account since 1998. Just wondering, does the 5 year rule apply to my 401K Roth, or does my 1998 Roth cover that.

This article would seem to indicate the latter:
https://www.kitces.com/blog/understa...d-conversions/
"And because the Roth rules aggregate all accounts together for the purposes of determining the tax treatment of various distributions, it’s necessary to track the various 5-year rules and the amounts they’re associated with, regardless of whether they are held separately or mingled together into a single account."

ALSO, while I'm at it, if I do a conversion into my 401K Roth now, will the conversion principal be available to me penalty free immediately or will I have to wait 5 years to touch even the principal, or perhaps wait until I'm 59 1/2 to touch the principal? I do realize each conversion has its own 5 year clock that applies to both principal and earnings, but does the rule of 55 nullify at least the principal part of that rule?

After some additional thinking, I guess I could just withdraw money straight up from my 401K IRA, pay the income tax and then put the withdrawn money in my old Roth and there would be no question that the principal would be available immediately, but that would be limited to $7000/year. My ultimate goal is to max out Roth's this year so I can minimize AGI in subsequent years to qualify for ACA subsidies.

I have done some reading on this but can't seem to find an answer that I'm fully confident in on either question.
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Old 08-02-2020, 07:01 AM   #2
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Keep in mind you have another option this year.... CARES Act, allow for up to 100k to be pulled out penalty free, then you have three years to pay the tax on that $100k.... Something to consider .....
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Rule of 55 Roth withdrawal ?'s
Old 08-02-2020, 07:22 AM   #3
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Rule of 55 Roth withdrawal ?'s

Unfortunately, the Rule of 55 only applies to regular, traditional ERISA accounts, i.e. standard 401k, 403b, TSP (Federal workers) and not to Roth accounts of any flavor or traditional IRAs.

The Roth world has entirely different rules than the traditional world and the two canít be intermixed without tax consequences.

It looks to me like you need one strategy for your traditional 401k using the Rule of 55. You need a separate strategy for your Roth accounts using the 5 year rules to get at your principal. And maybe you can use a combo of home equity loans, cash and part time work to get you to age 59.5.
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Old 08-02-2020, 07:33 AM   #4
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Keep in mind you have another option this year.... CARES Act, allow for up to 100k to be pulled out penalty free, then you have three years to pay the tax on that $100k.... Something to consider .....
Ahh, very nice. I will definitely take advantage of that to some degree. The degree matters whether I will be able to access the conversion principal immediately as my 401K money (about $925K right now) is the money I need to live on the next 3 1/2 years.
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Old 08-02-2020, 07:42 AM   #5
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Make sure to find and read your company's specific 401(k) plan SPD online at your benefits site. Some do not support the rule of 55. I recommend not trying to call your HR department as they generally are ignorant of this. You need to read your company's plan SPD yourself.

The summary*plan*description (SPD) is simply a summary of the*plan document*required to be written in such a way that the participants of the benefits*plan*can easily understand it.*
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Old 08-02-2020, 07:56 AM   #6
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Make sure to find and read your company's specific 401(k) plan SPD online at your benefits site. Some do not support the rule of 55. .*
Hmm, From what I've read this is handled outside the 401K custodian. If you can prove you quit at 55+ you don't have to pay penalties when you withdraw from your 401K. Unless you mean the company will force me to roll my money out of their 401k upon retirement, which isn't the case (it's a giant mega-corp).

e.g. The IRS Rule of 55 allows an employee who is laid off, fired, or who quits a job between the ages of 55 and 59 1/2 to pull money out of their 401(k) or 403(b) plan without penalty.2 This applies to workers who leave their jobs anytime during or after the year of their 55th birthdays.

That seems pretty cut and dried to me.
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Old 08-02-2020, 08:01 AM   #7
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For a good answer, try posting at fairmark.com in the Retirement Forum. Look for an answer by Alan S.

click on Tax Help and then the link to the Forum.
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Old 08-02-2020, 08:17 AM   #8
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My helpful tip on plan SPD rules potentially not supporting your rule of 55 withdrawal plans is valid, and well documented in other threads in this and other forums and many financial advise articles. Company plan providers may not allow withdrawals, may require you to take all at once as a tax disaster lump sum, or require a rollover. If you rollover to an IRA, you cannot use rule of 55. Only your plan SPD can verify if it allows a Rule of 55 withdrawal(s) and, if so, whether the money must come out in one single payment or not.

Cut and dry indeed. Why would you not read the SPD now and avoid a costly tax surprise later?
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Old 08-02-2020, 09:03 AM   #9
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To be clear, the rule of 55 applies to the year in which you turn 55, not when you turn 55. So if you leave in January and your birthday is in Dec, the rule of 55 will allow 401k withdrawals without penalty starting in January.

And to reiterate, the rule of 55 does not force 401k plans to allow it. Read your SPD or give them a call. I called FIDO for my plan and mine allows rule of 55 withdrawals (very flexible). I asked them if all plans do or are required to and they said no.
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Old 08-02-2020, 10:00 AM   #10
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And to reiterate, the rule of 55 does not force 401k plans to allow it. Read your SPD or give them a call. I called FIDO for my plan and mine allows rule of 55 withdrawals (very flexible). I asked them if all plans do or are required to and they said no.
Here's what the SPD has on post retirement distributions. Note the VIP is the 401K plan...

You may
• receive one or more partial distributions, with the balance of your account remaining in the VIP.
• Receive monthly, quarterly, semiannual or annual installment payments in a fixed dollar amount specified by you.

<Regarding Rule of 55>
Exceptions to the 10 percent early withdrawal tax may apply, including if you terminate employment during or after the year you reach age 55. For details, call the Retirement Service Center.

I've previously talked to the retirement service center about rule of 55 and they told me I can make withdrawals as needed, and the rest is between you and the IRS. While there's a bit of ambiguity still, I think I'm OK in that regard.

I'll post to the suggested site for the Roth questions I have and report back if I learn anything over and above what's already been noted here.
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Old 08-02-2020, 10:15 AM   #11
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If the plan allows withdrawals, then the IRS will allow them penalty free. This is good news.
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Old 08-02-2020, 10:20 AM   #12
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Quote:
Originally Posted by 54andchange View Post
my helpful tip on plan spd rules potentially not supporting your rule of 55 withdrawal plans is valid, and well documented in other threads in this and other forums and many financial advise articles. Company plan providers may not allow withdrawals, may require you to take all at once as a tax disaster lump sum, or require a rollover. If you rollover to an ira, you cannot use rule of 55. Only your plan spd can verify if it allows a rule of 55 withdrawal(s) and, if so, whether the money must come out in one single payment or not.

Cut and dry indeed. Why would you not read the spd now and avoid a costly tax surprise later?
OP

Heed this post!
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