"Rule of 55" with a caveat

[jimbohoward69]

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.

 

[teej1985]

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.

 

[njhowie]

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

 

[sengsational]

It's all about the plan administrator. Call them and ask if they'd code your withdrawal as penalty-free.

 

[zinger1457]

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.

 

[jazz4cash]

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.

 

[Bigdawg]

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.

 

[Out of Steam]

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.

 

[L Carlisle]

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

 

[jazz4cash]

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.com/tsp-withdrawal-penalty/

 

[Big_Hitter]

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.

 

[zinger1457]

“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.com/tsp-withdrawal-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

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);

 

[jazz4cash]

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.

 

[zinger1457]

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.

 

[jazz4cash]

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.

 

[pb4uski]

It sounds to me like you were saying the same thing.