Retirement in my 55th year

[mschipa]

Hi Everyone,

This might be a complicated question. I "retired" last January, 2014, I was 53 at the time. I put retired in quotes because I volunteered for a layoff that was too good to be true (75 weeks of pay plus bennys). I knew that if you retired in your 55th year (turn 55 in the same year of retirement) you would be excluded from the 10% withdrawal penalty.

So here's the question - because I technically was laid off and my layoff ends in June 2015, the year I turn 55, do I qualify for the exclusion?

Thank you,

Mike

 

[eytonxav]

Were you paid in January 2014 via a lump sum or did/will you receive periodic pay over the period until you turn 55? I am not sure of the actual answer, but I suspect the answer to that question may play a role in whether or not you can avoid the 10% penalty.

 

[2B]

It really shouldn't make much of a difference. You can roll the 401k over to an IRA and do a 72t for cash flow. No penalty involved but it is still subject to income tax.

You have to have been an employee when you turned 55. If you were not an employee you're out of luck so the 72t is your only option.

Leaving Your Job On or After Age 55
The age 59½ distribution rule says any 401k participant may begin to withdraw money from his or her plan after reaching the age of 59½ without having to pay a 10 percent early withdrawal penalty.
There is an exception to that rule, however, which allows an employee who retires, quits or is fired at age 55 to withdraw without penalty from their 401k (the "rule of 55"). There are three key points early retirees need to know.
First, this exception applies if you leave your job at any time during the calendar year in which you turn 55, or later, according to IRS Publication 575.
Second, if you still have money in the plan of a former employer and assuming you weren't at least age 55 when you left that employer, you'll have to wait until age 59½ to start taking withdrawals without penalty. Better yet, get any old 401k's rolled into your current 401k before you retire from your current job so that you will have access to these funds penalty free.
Third, this exception only applies to funds withdrawn from a 401k. IRAs operate until different rules, so if you retire and roll money into an IRA from your 401k before age 59½, you will lose this exception on those dollars.

 

[growing_older]

There is an exception to that rule, however, which allows an employee who retires, quits or is fired at age 55 to withdraw without penalty from their 401k (the "rule of 55"). There are three key points early retirees need to know.
First, this exception applies if you leave your job at any time during the calendar year in which you turn 55, or later

It looks like leaving at 53 does NOT qualify for this treatment, so you may have to consider the 72t option.

 

[mschipa]

I am still getting a check every other week. Would that make a difference?

 

[2B]

I am still getting a check every other week. Would that make a difference?

Ask your HR department is you are still considered an "active employee" that would allow you to take withdrawals from your 401k without penalty. This assumes you have not been terminated already. Have they been continuing to match 401k contributions (if you were allowed to make any). If you haven't been able to participate in the 401k, I suspect you are no longer an active employee.

If there is any doubt, the 72t process is pretty simple.

 

[clifp]

Definitely check with the HR department. Did they take away with your badge, do an exit interview etc?

 

[gauss]

You might want to also ask your question over at fairmark.com.

I have received high quality responses on my retirement income/taxation issues at their site.

-gauss

 

[jimnjana]

If you are receiving w2 income, then as far as the irs is concerned, you should qualify.

 

[growing_older]

I am still getting a check every other week. Would that make a difference?

Is it a paycheck? Do you show deductions for FICA, 401k and other payroll expenses? If it's just a series of payments for the severance then you may have a difficult time claiming that was employment, and if you are still employed, then you owe SS, and all the rest.

 

[Debinnov a]

Just for clarification, the rule is you have to have been "at least" 55 when you left the employer? So if you were 55 or older you don't have the withdrawal penalty?

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[LOL!]

I think technically the rule is to leave employment in the year one turns 55, so technically one could leave earlier in the year when they are still age 54. This is like the catch-up provision for 401(k) and 403(b) and IRAs where one can contribute the catch-up at age 49 as long as one is age 50 on 12/31. The HSA catch-up is age 55.

 

[martyb]

Yep, as long as you are going to turn 55 sometime during the year. You can be 54, it's January when you retire..... with your 55th birthday not happening until December, but you still qualify for the no - penalty exemption. IF your employer allows it within their retirement plan.

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[Sunset]

It really shouldn't make much of a difference. You can roll the 401k over to an IRA and do a 72t for cash flow. No penalty involved but it is still subject to income tax.....

When you do the roll-over, split the 401K into 2 or 3 roll-over IRA's, and do the 72t on 1 of them. (the split does not have to be equal amts).
This will allow you in a dire emergency, or after you turn 59.5 to take out from the other ira some funds which is subject to normal rules (like possible 10% penalty).
Because if you break the 72t ira by taking out extra $$$, there is a very large penalty.
(I have not done the 72t, but recall this tidbit, however, if I'm wrong someone can correct me).
Splitting your rollover is harmless, and they can be combined later into 1 once you are past the 5 yr rule.

 

[teejayevans]

Splitting your rollover is harmless, and they can be combined later into 1 once you are past the 5 yr rule.

Just to clarify, the 5 year rule only applies to the IRAs that you are doing a 72t on. Until you do the 72t, you can recombine or move between IRAs as you want.


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[jazz4cash]

I think technically the rule is to leave employment in the year one turns 55, so technically one could leave earlier in the year when they are still age 54. QUOTE]

This part always confuses me and it is likely to be critical to my plans, so I looked it up (again). The IRS website says the following:

Tax on early distributions. If a distribution is made to a participant before he or she reaches age 59½, the participant may be liable for a 10% additional tax on the distribution. This tax applies to the amount received that the employee must include in income.

Exceptions. The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances:
.
.

" Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55."

Here is the link to the entire document....
401(k) Resource Guide - Plan Sponsors - General Distribution Rules