between 55 and 59 and the 10% early withdrawal penalty

[albundyz]

OK, this is my first contribution. I post this only because I learned something new and someone else may benefit from what I learned.

Before I explain, let me thank all the wonderful contributors to this message board. As a lurker I have loved reading the messages and gained valuable insight.

Warning: if you’re not between the ages of 55 and 59 ½ this will probably be a boring post.

My problem: I will be retiring this year at 56. I will be getting a lump sum retirement distribution which I plan to have a direct rollover into an IRA at a place like Vanguard. I believe the IRA rules say that you cannot take a distribution from an IRA until 59 ½ unless you are willing to accept a 10% penalty. So, my problem is how to get money without incurring the 10% penalty.

My employer, Megacorp, sponsors my 401K plan. The plan is managed by T. Rowe Price. I often log on to the T Rowe Price website to check my account and to get ideas on retirement. When I go there, to “my retirement plan”, there is a pushbutton for “Distributions” and on the succeeding webpage it says quite clearly. “When you retire, you have 4 options”. All four options contain the phrase “if you are under 59½, a 10% early withdrawal penalty may also apply”.

Being a newbie, I accepted this, that my 401K plan would not allow me to get distributions at 56 years old without incurring a 10% penalty.

Eventually, I started to research the 72T allowance of the IRS for taking equal distributions before the age of 59 ½ to avoid the 10% penalty. I thought this might be my solution.

I also visit many retirement-like message boards, and, I can’t really remember where I saw this, but some poster said that he/she was receiving penalty-free distributions from his 401K because he had reached the age of 55. So, I went to the IRS website on 401Ks and found that the IRS has a few “exceptions” to the 10% penalty. One exception was that if you have a “separation of service” from the employer who is sponsoring your 401K plan, AND you are 55 or more, you can be excluded from incurring the 10% penalty.

So, I called T. Rowe Price, and they were very knowledgeable and agreed that I COULD take a distribution from my 401k plan, after I retire, because I did qualify for the IRS noted exception to the 10% penalty…..because I was retiring and it was a separation of service situation.

I then asked why wasn’t that stated on their website and they told me that every sponsor (Megacorp) sits down with T Rowe Price to determine how their retirement plan will look and what their webpages say. Apparently, my company felt that any reference to the exclusion that I have, would only cause confusion.

Lesson learned? If you’re between 55 and 59 ½ AND you have a “separation of service” from your employer AND you’re looking to get money from your employer-sponsored 401K plan AND you’re looking to avoid the 10% penalty…..talk to the company that manages your 401K (e.g. T. Rowe Price) and see if you get the same results, I did. You might be surprised.

FWIW, I have enough savings to last for 2 ½ years, that would bridge the gap from 56 to 58 ½. I plan to take a one-time distribution from my 401K to cover living expenses for that one year until I reach 59 ½. Actually, I will end my 401K by taking part as a cash distribution and rolling the remaining monies of my 401K into an IRA. I believe the T Rowe Price representative said I could not take a partial distribution from the 401K, but I’m not sure of that.

 

[albundyz]

by the way, in case I was not clear, my 401K is completely separate from the lump sum distribution that I will be getting later this year. I plan to take distributions from the lump sum after I'm 59 1/2

 

[cute fuzzy bunny]

Unless i'm mistaken you could also contact vanguard, have them fill out the paperwork to do a 401k-ira rollover without any real effort from you, then once thats done begin a regular 72t withdrawal series directly from the vanguard IRA.

Much data here: http://retireearlyhomepage.com/wdraw59.html

 

[albundyz]

thank you for your response, but I did not want to be restricted by the restrictions contained in the 72T

 

[ScaredtoQuit]

Be careful about the distributions though. There are three or four methodologies that you can use to compute the amount of your withdrawal each year. Some involve using computing your withdrawal based on your actuarially determined lifespan... another (if I remember right) is computed based on an amortization schedule. But the simplest methodology is to just withdraw the same amount every year for all five years.

Failure to follow one of the IRS approved methodologies can result in the penalty being retroactively implemented. For example, if you withdraw 20K when you are 58, $20K when you are 59, $20K when you are 60, 20K when you are 61 and then $25K when you are 62, you can STILL be assessed the penalty for all the back years prior to age 59-1/2 even though you were older than the statutory age at the time you deviated from the schedule.

A good book can be had on the subject... Nolo's book on IRA Withdrawals. It's very expensive though. I just borrowed it from the library.

 

[albundyz]

Be careful about the distributions though. There are three or four methodologies that you can use to compute the amount of your withdrawal each year. Some involve using computing your withdrawal based on your actuarially determined lifespan... another (if I remember right) is computed based on an amortization schedule. But the simplest methodology is to just withdraw the same amount every year for all five years.

Failure to follow one of the IRS approved methodologies can result in the penalty being retroactively implemented. For example, if you withdraw 20K when you are 58, $20K when you are 59, $20K when you are 60, 20K when you are 61 and then $25K when you are 62, you can STILL be assessed the penalty for all the back years prior to age 59-1/2 even though you were older than the statutory age at the time you deviated from the schedule.

A good book can be had on the subject... Nolo's book on IRA Withdrawals. It's very expensive though. I just borrowed it from the library.

I assume you are referring to 72T

I'm not using 72t

as far as I know there will be no restrictions on my withdrawal from my 401K

 

[2B]

I assume you are referring to 72T

I'm not using 72t

as far as I know there will be no restrictions on my withdrawal from my 401K

You may want to use a 72t to balance out your depletion of tax paid assets. The other approach is to roll over IRA money into a Roth. That would give you future options to tax manage future withdrawls.

 

[Martha]

Albundyz must be feeling like no one is hearing him.

He is going to keep his 401k and withdraw as much as he pleases when he pleases with no penalty. This is because he is older than 55 or at least turning 55 in the year he is retiring from the job were he has the 401k.

So, he doesn't care about 72t.

 

[scrinch]

Are there any restrictions to this type of withdrawal? Specifically, do you have to assert your right to take them by making a withdrawal in the year that you retire, or can you take them whenever you want (between 55 and 59) once you qualify?

 

[jazz4cash]

Albundyz must be feeling like no one is hearing him.

He is going to keep his 401k and withdraw as much as he pleases when he pleases with no penalty. This is because he is older than 55 or at least turning 55 in the year he is retiring from the job were he has the 401k.

So, he doesn't care about 72t.

yeah, Martha.........I was thinking the same thing...........WE HEARYA, AL!
BTW, SOME companies allow rollovers from a 401k to an IRA at ANY AGE, without seperation...it just depends on how the plan is drawn up. In that situation, the rollover to the IRA is penalty free, but once the funds are in the IRA, you would lose the potential to withdraw penalty free at age 55 with seperation.......except by 72t, which Al doesn't care about.

 

[crazy connie]

OK, this is my first contribution. I post this only because I learned something new and someone else may benefit from what I learned.

Before I explain, let me thank all the wonderful contributors to this message board. As a lurker I have loved reading the messages and gained valuable insight.

Warning: if you’re not between the ages of 55 and 59 ½ this will probably be a boring post.

My problem: I will be retiring this year at 56. I will be getting a lump sum retirement distribution which I plan to have a direct rollover into an IRA at a place like Vanguard. I believe the IRA rules say that you cannot take a distribution from an IRA until 59 ½ unless you are willing to accept a 10% penalty. So, my problem is how to get money without incurring the 10% penalty.

My employer, Megacorp, sponsors my 401K plan. The plan is managed by T. Rowe Price. I often log on to the T Rowe Price website to check my account and to get ideas on retirement. When I go there, to “my retirement plan”, there is a pushbutton for “Distributions” and on the succeeding webpage it says quite clearly. “When you retire, you have 4 options”. All four options contain the phrase “if you are under 59½, a 10% early withdrawal penalty may also apply”.

Being a newbie, I accepted this, that my 401K plan would not allow me to get distributions at 56 years old without incurring a 10% penalty.

Eventually, I started to research the 72T allowance of the IRS for taking equal distributions before the age of 59 ½ to avoid the 10% penalty. I thought this might be my solution.

I also visit many retirement-like message boards, and, I can’t really remember where I saw this, but some poster said that he/she was receiving penalty-free distributions from his 401K because he had reached the age of 55. So, I went to the IRS website on 401Ks and found that the IRS has a few “exceptions” to the 10% penalty. One exception was that if you have a “separation of service” from the employer who is sponsoring your 401K plan, AND you are 55 or more, you can be excluded from incurring the 10% penalty.

So, I called T. Rowe Price, and they were very knowledgeable and agreed that I COULD take a distribution from my 401k plan, after I retire, because I did qualify for the IRS noted exception to the 10% penalty…..because I was retiring and it was a separation of service situation.

I then asked why wasn’t that stated on their website and they told me that every sponsor (Megacorp) sits down with T Rowe Price to determine how their retirement plan will look and what their webpages say. Apparently, my company felt that any reference to the exclusion that I have, would only cause confusion.

Lesson learned? If you’re between 55 and 59 ½ AND you have a “separation of service” from your employer AND you’re looking to get money from your employer-sponsored 401K plan AND you’re looking to avoid the 10% penalty…..talk to the company that manages your 401K (e.g. T. Rowe Price) and see if you get the same results, I did. You might be surprised.

FWIW, I have enough savings to last for 2 ½ years, that would bridge the gap from 56 to 58 ½. I plan to take a one-time distribution from my 401K to cover living expenses for that one year until I reach 59 ½. Actually, I will end my 401K by taking part as a cash distribution and rolling the remaining monies of my 401K into an IRA. I believe the T Rowe Price representative said I could not take a partial distribution from the 401K, but I’m not sure of that.

Get a copy of the Summary Plan Description (SPD on the 401K from your HR) and read up on the distribution after separation from Mega Corp. That will trump any conversational verbiage from the T. Rowe Price employee. Many companies allow only total distribution post retirement.

Remember the T. Rowe Price employee works with many mega-corps employees and all various plans. They are most versed in T. Rowe Price policy vs. your specific Mega Corp.

This I learned after rolling out my pension lump sum before my 401K which is still at Mega Corp. Like you, I want to avoid the 72T Plan with it's restrictions.

 

[2B]

Albundyz must be feeling like no one is hearing him.

He is going to keep his 401k and withdraw as much as he pleases when he pleases with no penalty. This is because he is older than 55 or at least turning 55 in the year he is retiring from the job were he has the 401k.

So, he doesn't care about 72t.

I thought I had heard him but I'll have another go. My comments are for mminimizing his tax situation.

For the two years he's living off of his non-IRA or 401k cash, he's missing the opportunity to take money out of his plans at a very low tax rate. He can do that by spreading his 401k money out over the whole period, converting IRA money to a Roth or getting a 72t. I may not have been as clear as this (or maybe this isn't clear either) but this is a classic opportunity to tax manage his withdrawls.

He can bring money out of the tax sheltered arena at a lower marginal tax rate since he is living on tax paid cash.

 

[albundyz]

Crazy Connie: thanks, I'll do that

2B: thanks for your comment, I know your intention was in my best interest. I did not want to introduce too many topics in one message. When I said that I would live off savings for two years, actually, the money will not come from a savings account. The two years of money will come from my wife's 401K who will be 59 1/2 before I will.

Just to make sure I understand what you were saying, however, is that had the money been in a savings acct, it probably would have already been taxed, and therefore could have been used over the three year period to lower my overall FIT. I assume that's what you meant.

 

[2B]

Just to make sure I understand what you were saying, however, is that had the money been in a savings acct, it probably would have already been taxed, and therefore could have been used over the three year period to lower my overall FIT. I assume that's what you meant.

I assumed the money was already taxed and I wanted to let you know that you could move money out of your IRA to a Roth at a very low tax rate. I would encourage anyone to not abandon a very low marginal tax rate in the early phase of retirement. Take enough income to max out at least the 10% and maybe the 15% marginal tax rate.

 

[boilerman]

401K withdrawals without a penalty

OK - I am really trying to understand this topic so please bear with me.

I want to withdraw from my 401K when I retire at age 57 without paying the 10% penalty. If I take equal payments, say an annual amount of $40K for each calendar year starting in the year I retire, I would make the withdrawals during the year I retire (at 57), the next year and the year after (year 58 and 59.) That's 3 withdrawals of $40K each.

Then after I reach 59 1/2, I can start making withdrawals of any amount? I could skip a few years and not make any withdrawals at all? Is the payment I select, $40K in this case, important, or is it unimportant as longs as it's the same amount each year before 59 1/2?

 

[EngineeringMyFinances]

AFAIK, under 72t rules you have to continue the distributions at the same rate for 5 years regardless. And the distributions have to be set at the start to last your "expected lifetime". So if the distribution rate would exhaust your IRA at age 70, it wouldn't fly with the IRS.

Outside of 72t, the IRS allows distributions without penalty from your 401(k) if you leave your employer in or after the year you turn 55 from that employer's plan. But the plan rules also have to allow it.

I wouldn't rely on some webmaster's interpretation of the plan rules. Ask for a copy the Summary Plan Description for your 401(k) plan and see what it says.

 

[garrynky]

My situation is sorta reversed to Albundyz. Since my wife is two years younger than I, when we retire at the end of this year we will take a withdrawal from her 401k (also at Trowe) since we can't make another withdrawal from her account for several years.

 

[FinanceDude]

Albundyz must be feeling like no one is hearing him.

He is going to keep his 401k and withdraw as much as he pleases when he pleases with no penalty. This is because he is older than 55 or at least turning 55 in the year he is retiring from the job were he has the 401k.

So, he doesn't care about 72t.

 

[Coach]

OK - I am really trying to understand this topic so please bear with me.

I want to withdraw from my 401K when I retire at age 57 without paying the 10% penalty. If I take equal payments, say an annual amount of $40K for each calendar year starting in the year I retire, I would make the withdrawals during the year I retire (at 57), the next year and the year after (year 58 and 59.) That's 3 withdrawals of $40K each.

Then after I reach 59 1/2, I can start making withdrawals of any amount? I could skip a few years and not make any withdrawals at all? Is the payment I select, $40K in this case, important, or is it unimportant as longs as it's the same amount each year before 59 1/2?

boilerman, as far as the IRS is concerned, if you terminate in or after the year you turn 55 you can withdraw from your 401k penalty free. Any amount, no amount, whatever.

Your plan may have additional limitations.

See here.

Read past the IRA stuff.

Coach

 

[boilerman]

boilerman, as far as the IRS is concerned, if you terminate in or after the year you turn 55 you can withdraw from your 401k penalty free. Any amount, no amount, whatever.

Your plan may have additional limitations.

See here.

Read past the IRA stuff.

Coach

OK, so I'm making this more complicated that I need to? As long as I keep my funds in the 401K and not roll it over into an IRA upon retirement, then I would qualify for the exception to the normal 10% penalty and I can withdraw from the my 401K between 57 and 59 1/2 any way I choose?

 

[limpid lizard]

What I Did

I rolled my penision cash out into Vanguard as an IRA. I rolled over half of my 401K into a separate Vanguard IRA. I left enough in my 401K to live about 7 years. I am 55.

The ideas were: 1) Vanguard is cheaper. 2) Vanguard has more options. 3) If disaster strikes, I can access the IRA's through separate 72t's. Hopefully things will not deteriorate to the point where I have to access both accounts. I am planning to leave the pension cash out ride for 10 years.

I hope Ihave not out smarted myself.

 

[clifp]

I rolled my penision cash out into Vanguard as an IRA. I rolled over half of my 401K into a separate Vanguard IRA. I left enough in my 401K to live about 7 years. I am 55.

The ideas were: 1) Vanguard is cheaper. 2) Vanguard has more options. 3) If disaster strikes, I can access the IRA's through separate 72t's. Hopefully things will not deteriorate to the point where I have to access both accounts. I am planning to leave the pension cash out ride for 10 years.

I hope Ihave not out smarted myself.

I think you are being smart. Once you are 59 then I'd roll it all over to Vanguard.

I would recommend that, when possible, people in the 55 to 59.5, sort out the issues while still working. My experience is that it helps to be working at the company when deal with 401K administrators, on unusual requests.

 

[DRiP Guy]

[from a 401(k) plan description:]

Withdrawal Penalties 10% IRS early withdrawal penalty if withdrawn before age 59 ½ unless exception applies.

Exceptions include:

• Normal retirement age
• Death
• Disability
• Substantially equal payments made over life expectancy
• Termination of service after five years and reaching age 55
• Rollover to an IRA
• Qualified military reservist

• https://www.wellsfargo.com/biz/products/retirement/ind_401k

And I don't have a cite, unfortunately right now, but I researched this in past, and I believe it's actually 54 plus a day, BTW, if you were fortunate enough to have been born on Dec 31 -- since the IRS applies the age rule like so:

Q. How is my age calculated?

A. Age is your attained age as of your birthday in the calendar year that goes with the distribution year.

Don't trust my word, though, find the actual citation, but I am confident of both parts, so the net result is that:

With no 72(t), a person can be 54 1/2, and take out every penny of their 401(k) if they quit or are terminated and does not go back to work, and avoid the 10% penalty. Watch out for taxes on gross income, though!

Greaney also provided advice on this route on his site:

You can make penalty-free withdrawals from a 401(k) at age 55. You must wait until age 59 1/2 to make penalty-free withdrawals from an IRA. While this seems like a big break for a 55-year-old retiree, there are several things to consider; (1) Your employer must make it convenient for an ex-employee to make retirement withdrawals, many employers can't be bothered, (2) Rolling over your 401(k) funds to an IRA may increase the variety of investments available to you and lower your fees. If that's the case, the hassle of SEPP withdrawals from an IRA may be worth it.

Note: There is one fine point that many people miss in taking penalty-free withdrawals from a 401k at age 55. To do so, you must terminate your employment no earlier that the year in which you turn age 55. (See IRS Notice 87-13) If you retired at age 54 and waited until age 55 to make withdrawals from your 401k, you would not be able to make unlimited penalty-free withdrawals. You could only make penalty-free withdrawals by using SEPP.

Retire Early: Can I withdraw money from my IRA before age 59½ ?


And, here is a clip that includes a citation to the IRC:

...section 72(t)(2)(A)(v) provides an exception to the 10% penalty for distributions made after the employee separates from service for the employer maintaining the plan, but only if the separation from service occurs during or after the calendar year in which the employee attains age 55. See Notice 87-13, 1987-1 C.B. 432, Q&A-20.

10% Additional Income Tax on Early Distributions: The Exception for Distributions After Age 55 and Separation from Service, Revisited

 

[EngineeringMyFinances]

OK, so I'm making this more complicated that I need to? As long as I keep my funds in the 401K and not roll it over into an IRA upon retirement, then I would qualify for the exception to the normal 10% penalty and I can withdraw from the my 401K between 57 and 59 1/2 any way I choose?

That's the consensus, for the employer you work past the age of 55. However, the 401(k) plan rules also have to allow it. Get a copy of the Summary Plan Description and read it for yourself. Don't rely on possibly incorrect web site software or what some clerk tells you.

Get the SPD and read if for yourself.