Join Early Retirement Today
Reply
 
Thread Tools Display Modes
"Rule of 55" with a caveat
Old 03-20-2021, 02:15 PM   #1
Recycles dryer sheets
 
Join Date: Feb 2007
Posts: 70
"Rule of 55" with a caveat

Well, after being FIRE for over a year now, I've received a tentative job offer from a federal agency I've wanted to work at for years...which should turn into a final offer very soon. My 401k equivalent is the Thrift Savings Plan, which I contributed to during both my military career and my first run as a civil servant (2013-2019).

I've been going back-and-forth in my head as to how long I'd like to stay on (if I get the job obviously) before I officially, officially retire. Then, I came across the "Rule of 55", which states that if you separate/retire in the year in which you turn 55, you can start distributions from your TSP penalty free instead of having to wait until you're 59 1/2. I'll be 51 in May.

On the surface, it sounds pretty straight forward. However, I have scoured the internet and can't seem to find any info regarding how "breaks in service" are considered. I retired from the military in 2011, then took a two year hiatus until I became a civil servant in 2013. There will then be a 1.3 year gap between when I first left the fed gov until now.

Before I consult a tax attorney or CFP, I wanted to see if anyone here has dealt with a similar scenario? I just wonder if employment gaps are considered "separation/retirement" (therefore rendering the rule useless) or if it's just as simple as the rule states, regardless of past breaks in service.
jimbohoward69 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 03-20-2021, 03:02 PM   #2
Full time employment: Posting here.
 
Join Date: Nov 2015
Posts: 685
This isn't a TSP specific rule, it is applicable to all employer plans..

Seperate the year you turn 55 - if your birthday is in December nad you quit in January of the year you turn 55, you're still good to go to avoid the penalty.
teej1985 is offline   Reply With Quote
Old 03-20-2021, 03:05 PM   #3
Thinks s/he gets paid by the post
njhowie's Avatar
 
Join Date: Mar 2012
Posts: 3,931
Go by IRS Publication 575, which is the authority.

There is nothing which addresses breaks in service. The only requirement is that you start distributions in the year you separate from service at age 55 or above. What it specifically points out is that you cannot separate earlier than age 55, wait (while separated), and then begin distributions under the Rule of 55.

So, going back to employment where it is the same qualified retirement plan, and then separating at age 55 or above allows you to make use of it.

https://www.irs.gov/pub/irs-pdf/p575.pdf
njhowie is offline   Reply With Quote
Old 03-20-2021, 03:11 PM   #4
Moderator
sengsational's Avatar
 
Join Date: Oct 2010
Posts: 10,656
It's all about the plan administrator. Call them and ask if they'd code your withdrawal as penalty-free.
sengsational is offline   Reply With Quote
Old 03-20-2021, 03:21 PM   #5
Thinks s/he gets paid by the post
zinger1457's Avatar
 
Join Date: Jul 2007
Posts: 3,222
It doesn't matter how many years you've worked or when the funds were deposited in the TSP, as long as you are working for the feds during the year you turn 55 you can start to take withdrawals after you leave. You could also tap into your TSP prior to age 55 by having the TSP calculate your withdrawals based on life expectancy, it meets the 72t requirements. Definitely read up on 72t if interested in going that route.

If you go back to work another thing to consider is if you should stay on long enough to qualify for health insurance in retirement. You would have to meet the (MRA +10) requirement, your prior service should take you over the required 10 years of service, the minimum retirement age (MRA) depends on the year you were born, probably around 57.
zinger1457 is offline   Reply With Quote
Old 03-20-2021, 06:13 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Aug 2004
Location: Laurel, MD
Posts: 8,309
Quote:
Originally Posted by sengsational View Post
It's all about the plan administrator. Call them and ask if they'd code your withdrawal as penalty-free.


I don’t think it’ll work that way. As Howie suggests going back to work for the same employer would qualify. If going to work for a different employer a break in service would not disqualify if you roll funds from old plan to new plan or using a rollover IRA consisting of funds from an employer plan.
__________________
...with no reasonable expectation for ER, I'm just here auditing the AP class.Retired 8/1/15.
jazz4cash is online now   Reply With Quote
Old 03-20-2021, 06:20 PM   #7
Thinks s/he gets paid by the post
 
Join Date: Oct 2014
Posts: 1,537
MRA +10 is if you want your pension at that time. Do 5 and you still rate it albeit at 62/63. Military TSP and fed TSP will be treated as two separate TSP accounts. But your previous fed TSP will merge with the new one and rule of 55 applies. DW is a retired mil and a current fed. She gets 2 separate tsp statements.
__________________
-Big Dawg-FI since 9/2010. Failed ER in 2015. 2/15/2023=DONE! "Blow that dough"-Robbie

" People say I'm lazy, dreaming my life away Well, they give me all kinds of advice designed to enlighten me When I tell them that I'm doing fine watching shadows on the wall "Don't you miss the big time, boy. You're no longer on the ball" -John Lennon-
Bigdawg is offline   Reply With Quote
Old 03-20-2021, 06:55 PM   #8
Thinks s/he gets paid by the post
Out of Steam's Avatar
 
Join Date: Mar 2017
Posts: 1,636
Quote:
Originally Posted by zinger1457 View Post
If you go back to work another thing to consider is if you should stay on long enough to qualify for health insurance in retirement. You would have to meet the (MRA +10) requirement, your prior service should take you over the required 10 years of service, the minimum retirement age (MRA) depends on the year you were born, probably around 57.
I returned to the Federal Government after a long break in service, and it was pretty seamless, including restoration of past sick leave. If you're willing to work until age 57, an MRA+10 pension would be a nice addition to your retirement. As a military retiree, I suppose the health insurance is largely irrelevant.
Out of Steam is offline   Reply With Quote
Old 03-20-2021, 07:28 PM   #9
Dryer sheet aficionado
 
Join Date: Mar 2019
Location: Bellingham
Posts: 34
Quote:
Originally Posted by jimbohoward69 View Post
Well, after being FIRE for over a year now, I've received a tentative job offer from a federal agency I've wanted to work at for years...which should turn into a final offer very soon. My 401k equivalent is the Thrift Savings Plan, which I contributed to during both my military career and my first run as a civil servant (2013-2019).

I've been going back-and-forth in my head as to how long I'd like to stay on (if I get the job obviously) before I officially, officially retire. Then, I came across the "Rule of 55", which states that if you separate/retire in the year in which you turn 55, you can start distributions from your TSP penalty free instead of having to wait until you're 59 1/2. I'll be 51 in May.

On the surface, it sounds pretty straight forward. However, I have scoured the internet and can't seem to find any info regarding how "breaks in service" are considered. I retired from the military in 2011, then took a two year hiatus until I became a civil servant in 2013. There will then be a 1.3 year gap between when I first left the fed gov until now.

Before I consult a tax attorney or CFP, I wanted to see if anyone here has dealt with a similar scenario? I just wonder if employment gaps are considered "separation/retirement" (therefore rendering the rule useless) or if it's just as simple as the rule states, regardless of past breaks in service.
I think you need to call your provider and ask if your employer and plan allow you to access the 55 rule. Not all plans and employers will allow it. I just went through this. I retired last August. My provider, Fidelity and my employer (big oil) both allowed me to utilize the "55 Rule". I have a small business and might also work part time if the market FALLS. I was informed my business and possible part time work would not be an issue.

Just don't allow them to move your plan into an IRA or plan not associated with your employer, otherwise you will have to wait until you are 59 1/2. Also you will not be able to access any 401k plan from a job you worked at earlier in your career, until you are 59 1/2 only the employers plan from the job you retired from after 1/1 the year you turn 55.

Fidelity tried to talk me into moving my 401k into an IRA. The representative I talked to the 1st time had limited knowledge of the "55 Rule". The "big oil" Fidelity representative understood to the rule very well.

Good Luck
L Carlisle is offline   Reply With Quote
Old 03-23-2021, 04:42 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Aug 2004
Location: Laurel, MD
Posts: 8,309
A quick search shows several websites that confirm the age 55 exception is a feature of the TSP. They make it sound like it is some exclusive to TSP and not available in private industry!

“If you are age 55 or older when you separate from service, you can take withdrawals from your TSP without penalties. The key concept here is that in order to not have penalties you have to be age 55+ and be separating from service.”
Excerpt from....

https://plan-your-federal-retirement...rawal-penalty/
__________________
...with no reasonable expectation for ER, I'm just here auditing the AP class.Retired 8/1/15.
jazz4cash is online now   Reply With Quote
Old 03-23-2021, 04:48 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Big_Hitter's Avatar
 
Join Date: May 2013
Location: Les Bois
Posts: 5,761
After re-reading your post a few times, it appears your question has to do with rejoining the plan after being separating from service and then "retiring" under the rule of 55?

As posted above, you need to talk to the plan administrator and/or counsel before making any decisions.
__________________
You can't be a retirement plan actuary without a retirement plan, otherwise you lose all credibility...
Big_Hitter is offline   Reply With Quote
Old 03-23-2021, 06:38 PM   #12
Thinks s/he gets paid by the post
zinger1457's Avatar
 
Join Date: Jul 2007
Posts: 3,222
Quote:
Originally Posted by jazz4cash View Post
“If you are age 55 or older when you separate from service, you can take withdrawals from your TSP without penalties. The key concept here is that in order to not have penalties you have to be age 55+ and be separating from service.”
Excerpt from....

https://plan-your-federal-retirement...rawal-penalty/
The TSP rule regarding age 55 is that the withdrawal is penalty free if you separate from service during the year you turn 55. The TSP web site has most if not all of the information needed, it might take some digging but best to get it from the source.
https://www.tsp.gov/publications/tsp-536.pdf
Quote:
The additional 10% tax generally does not
apply to
• payments made after you separate from service during
or after the year you reach age 55 (or the year you reach
age 50 if you are a public safety employee as defined in
section 72(t)(10)(B)(ii) of the Internal Revenue Code);
zinger1457 is offline   Reply With Quote
Old 03-24-2021, 01:42 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Aug 2004
Location: Laurel, MD
Posts: 8,309
Quote:
Originally Posted by zinger1457 View Post
The TSP rule regarding age 55 is that the withdrawal is penalty free if you separate from service during the year you turn 55.

https://www.tsp.gov/publications/tsp-536.pdf

It’s age 55 or after.
__________________
...with no reasonable expectation for ER, I'm just here auditing the AP class.Retired 8/1/15.
jazz4cash is online now   Reply With Quote
Old 03-24-2021, 03:43 PM   #14
Thinks s/he gets paid by the post
zinger1457's Avatar
 
Join Date: Jul 2007
Posts: 3,222
Quote:
Originally Posted by jazz4cash View Post
It’s age 55 or after.
The TSP follows the IRS 'separation from service' rules for penalty free withdrawals from qualified plans, it is during the year you turn 55. One could leave their job in Feb 2021 at 54, turn 55 in Dec 2021, and make penalty free withdrawals from the TSP. I retired from the Feds and this was covered during the retirement class we received, seems pretty clear to me in the TSP documents but if you believe otherwise I have no desire to change your mind.
zinger1457 is offline   Reply With Quote
Old 03-24-2021, 04:40 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Aug 2004
Location: Laurel, MD
Posts: 8,309
It’s not what I believe. The source you linked says an exception to the 10% early withdrawal penalty applies to:
“• payments made after you separate from service during or after the year you reach age 55 (or the year you reach age 50 if you are a public safety employee as defined in section 72(t)(10)(B)(ii) of the Internal Revenue Code);”

.....maybe we are saying the same thing. The wording of this “rule” is awkward IMO.
__________________
...with no reasonable expectation for ER, I'm just here auditing the AP class.Retired 8/1/15.
jazz4cash is online now   Reply With Quote
Old 03-25-2021, 06:17 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,264
It sounds to me like you were saying the same thing.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56
pb4uski is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
The 4% Rule is now the 5% Rule RenoJay FIRE and Money 96 10-28-2020 04:48 PM
80% rule? 4% Rule? What is it really? Talkjk Hi, I am... 20 09-29-2018 09:03 AM
Rating Services - Caveat imoldernu Travel Information 37 05-09-2017 12:15 PM
A caveat about ETFs Ed_The_Gypsy FIRE and Money 14 07-17-2016 04:42 PM
"Will the 70% Rule Apply to Your Retirement?" Nords Young Dreamers 2 07-19-2004 10:58 AM

» Quick Links

 
All times are GMT -6. The time now is 11:24 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.