Rule of 55 planning

[ArmchairMillionaire23]

I've been planning on retiring in 2025 since I found out about the "rule of 55".

https://www.fool.com/retirement/plans/401k/rule-of-55/

One of my concerns involves this paragraph:
"Any money in your current employer's 401(k) account when you leave your job will qualify for the rule of 55, so using rollovers to put as much money into that account as possible provides you with the most flexibility. If you don't roll the money from old 401(k)s or rollover IRAs into your current 401(k) before leaving, you won't have the option to withdraw without penalty until age 59 1/2."

With maximum contributions, employer contributions, and (hopefully) average gains from now until 2025 I hope to have somewhere around $500K in my current 401(k), which is managed by John Hancock. That would probably be more than enough for living expenses from ages 54-1/2 until 59-1/2.

But I also have a 401(k) from a previous employer with a current balance of around $650K. That 401(k) is managed by Vanguard, which has lower expense ratios and fees than the similar investments in my JH account.

So I'm trying to decide if and when to roll over my previous 401(k) into my current 401(k). The JH fees and expense ratios have lowered somewhat, but they're still still higher than Vanguard. I'm wondering if 5 years of slightly higher fees and expenses would be an acceptable trade-off to having more early access to some of my savings.

Any thoughts and/or suggestions based on other's experience(s) would be greatly appreciated.

Thanks,

 

[RxMan]

Personally I’d roll it over and accept the slightly higher fees to have easier access and fewer accounts to deal with. Is there any account fees like quarterly maintenance fees in that old 401k account? If so not having to pay those would offset at least a little bit of your higher 401k fees. If you have enough in your current 401k for those years until 59.5 years old then you can do nothing.

I’ve always kept my 401k money all in my current employer’s plan for simplicity. Do you have taxable accounts as well? Because if so that money could be used in those years leading up to age 59.5.

 

[Biker_on_FIRE]

You can still rollover 401ks after you turn 55....so you can always wait to rollover the Vanguard 401k into the JH 401k if you find that you don't have enough in your JH 401k to get you to 59.5.

 

[ArmchairMillionaire23]

You can still rollover 401ks after you turn 55....so you can always wait to rollover the Vanguard 401k into the JH 401k if you find that you don't have enough in your JH 401k to get you to 59.5.

Interesting. I hadn't thought that was possible. I'll have to check with my plan to see if I'm allowed to roll over a previous 401(k) into my existing one after I leave the company. I wonder what the IRS would say about that as well if I were already invoking the rule of 55. If it's possible and legal then I guess I don't have to worry about making it to 59.5.

Thanks for the info/suggestion!

 

[SecondAttempt]

I think you have to do the math. If you have $650k in Vanguard and roll it to Hancock and pay 1% higher fees for 4.5 years that is (650000)(0.01)(4.5)=$29,250. If you just pay the 10% penalty on the part you withdraw from you old 401k it may actually be less. Without knowing your specific numbers it is hard to analyze.

 

[zinger1457]

You could still access the money in your Vanguard 401K at any age before 59.5 using the 72t rules. Much more restrictive than using the 401K 55 rule, once you start you have to continue to 59.5, but it's another option. There are plenty of posts on the forum concerning 72t, definitely educate yourself before going that route.

 

[ArmchairMillionaire23]

You could still access the money in your Vanguard 401K at any age before 59.5 using the 72t rules. Much more restrictive than using the 401K 55 rule, once you start you have to continue to 59.5, but it's another option.

I looked into the 72t and you're right: It definitely requires close planning. But if I can't make it through the (a little more than) 3 years of Mega-Corp BS I guess I would consider going the 72t route. But if I can just hold on until January 1st, 2025...

 

[r3saving]

Interesting. I hadn't thought that was possible. I'll have to check with my plan to see if I'm allowed to roll over a previous 401(k) into my existing one after I leave the company. I wonder what the IRS would say about that as well if I were already invoking the rule of 55. If it's possible and legal then I guess I don't have to worry about making it to 59.5.

Thanks for the info/suggestion!

You shouldn't have to roll the entire Vanguard 401k into the John Hancock 401k, you can roll only what you need. You might then have to roll the remaining Vanguard 401k into an IRA (depending on the rules of that 401k).

I rolled some of an IRA into my 401k a few weeks before I retired and exercised the rule of 55 on the 401k.

There could be one "gotcha" to consider. In my case, the 401k administrator rules dictated that I could not withdraw from the 401k weekly or monthly but rather I had to take the entire amount at once. I could have rolled some into an IRA and withdrawn the rest as long at the 401k was depleted at once. Because of that rule, I arranged to withdrawal the bare minimum I needed for the next three years (I retired at 57 1/2). There was an income tax hit of course so I left work in October and made the withdrawal the following January.

Just something to consider looking into.

 

[ArmchairMillionaire23]

There could be one "gotcha" to consider. In my case, the 401k administrator rules dictated that I could not withdraw from the 401k weekly or monthly but rather I had to take the entire amount at once. I could have rolled some into an IRA and withdrawn the rest as long at the 401k was depleted at once. Because of that rule, I arranged to withdrawal the bare minimum I needed for the next three years (I retired at 57 1/2). There was an income tax hit of course so I left work in October and made the withdrawal the following January.
Just something to consider looking into.

Last I checked, my plan allows monthly distributions, as long as they are at least $5K. They will automatically withhold 20% for federal taxes, regardless of tax bracket.

 

[gauss]

I would consider doing nothing. Take your first $ out of the 401k at J.H. that will qualify for the rule of 55 penalty exclusion. If you have enough money to make it until age 59 1/2, then you are done.

If you run out of money then you have a couple of options.
1) Take what you need as you go out of the Vanguard 401k. You will be subject to the 10% penalty

2) Explore 72(t) options for the money in the Vanguard 401k. You will likely want to setup a couple of traditional IRAs in this process with one targeted with the proper balance to support the needs of the 72(t) rules.

3) Roth Convert some of the money in the Vanguard 401k now. It sounds like you have 3 years until age 55. You will need to wait 5 years to access these conversions in the new Roth IRAs to avoid the 10% penalty, but it sounds like you have the time. The only drawback is that if you think your marginal tax rate will significantly decrease in retirement, this may be less than optimal.

-gauss

 

[ArmchairMillionaire23]

Roth Convert some of the money in the Vanguard 401k now. It sounds like you have 3 years until age 55. You will need to wait 5 years to access these conversions in the new Roth IRAs to avoid the 10% penalty, but it sounds like you have the time. The only drawback is that if you think your marginal tax rate will significantly decrease in retirement, this may be less than optimal. -gauss

With maxing out all contributions, we manage to stay within the 12% tax bracket. I guess I could convert up to the top of the 12% bracket. After that the conversions would be taxed at 22%. Big jump.

I already have a Roth worth about $165K. I'll still contribute $7K to it in 2021, 2022, 2023, and 2024. I've been looking into doing Roth conversions but I'm on the fence since we will probably remain in the 12% bracket (as long as there still is one) after retirement as well.

 

[HI Bill]

I'd roll over the portion of your 401(k) that you'll need to access prior to 59.5 a month or so before you leave the company. That way you avoid years of higher fees, and still have access to the needed funds. I had been planning to do this, but with my OMY syndrome, by the time I FIRED, I had enough in taxable and 401(k) accounts to last me to 59.5, so I didn't need to.

 

[ArmchairMillionaire23]

I'd roll over the portion of your 401(k) that you'll need to access prior to 59.5

That's the big unknown, right there. Maybe I'll be in a similar situation to yours (hopefully without the OMY syndrome) and not have to worry about rolling anything over at the end of 2024.