Retiring year I turn 55: 401(k)

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mbetennis01
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Retiring year I turn 55: 401(k)

Post by mbetennis01 »

Hello Bogleheads:

It was mentioned on here by a poster that this rule of age 55 is not a part of your company’s 401k policy but is a (government?) rule.

I’m 55 and retiring at the end of this year and will be rolling over my 401k. A poster mentioned I could just ‘lop off’ a portion of that during rollover. In effect I would be able to access this money, avoid the 10% penalty but pay income tax on it.

Does anyone have direct experience doing this and could you indicate your process? Can Vanguard guide you through this?

Thanks in advance!
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retiredjg
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Re: Retiring year I turn 55: 401(k)

Post by retiredjg »

It is correct that the government (the IRS in this case) will not charge a 10% penalty on withdrawals from the 401k at the employer you retired from. This part has nothing to do with your employer's plan.

This benefit is lost if you roll the money to tIRA - the age goes back up to 59.5.

Your employer must allow you to withdraw your 401k when you retire, but they do not have to make it easy. They can limit your withdrawal to a 1 time lump sum of the entire balance rather than allow withdrawals at your convenience. Obviously, you don't want that.


I think you are asking about a partial rollover of your 401k - some to an IRA and some left in the 401k to take as you want for living expenses. Whether this will work for you depends entirely on the withdrawal options in your 401k plan.
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InvestorHowie
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Re: Retiring year I turn 55: 401(k)

Post by InvestorHowie »

@mbetennis01, Call Vanguard (800-523-1188) preferably with your Plan Number in hand and you can get this answered quickly. I just made precisely the same call last week and it took <5 mins and she knew of the 'year of age 55 rule' and explained that my plan's policy allows for partial on-demand withdrawals. Quick, easy and much less awkward than asking my employer's plan administrator when I'm still years out from pursuing this option.

(edited to correct OP's user id)
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delamer
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Re: Retiring year I turn 55: 401(k)

Post by delamer »

Just wanted to make sure you are aware of IRS Rule 72(t), that allows early withdrawals from your IRA without penalty:

https://www.thebalance.com/how-to-use-7 ... ls-2388257
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retiredjg
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Re: Retiring year I turn 55: 401(k)

Post by retiredjg »

mbetennis01 wrote: Sat Jul 24, 2021 7:46 am Can Vanguard guide you through this?
Is your 401k at Vanguard? :happy
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David Jay
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Re: Retiring year I turn 55: 401(k)

Post by David Jay »

mbetennis01 wrote: Sat Jul 24, 2021 7:46 amA poster mentioned I could just ‘lop off’ a portion of that during rollover. In effect I would be able to access this money, avoid the 10% penalty but pay income tax on it.
Start with your 401k SPD (summary plan description). Your company is required by law to make this document available. What you are looking for is the ability to make “partial withdrawals” (key phrase) after separation from service and before age 59.5.

If your plan allows it, simply leave your living expenses for ages 55-59 in your 401k at retirement and roll over the remainder to your IRA.
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Topic Author
mbetennis01
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Re: Retiring year I turn 55: 401(k)

Post by mbetennis01 »

Thanks to all for taking time to reply. I am aware of the 72t option - thank you though for that reference which I saved. I will check my Plan SPD as was suggested. Our plan has Vanguard funds, but it is not with Vanguard. Much appreciated!
Vanguard User
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Re: Retiring year I turn 55: 401(k)

Post by Vanguard User »

Also, is it recommended to withdraw at 55 or better to use another account like a taxable?
MrJedi
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Re: Retiring year I turn 55: 401(k)

Post by MrJedi »

Vanguard User wrote: Sun Jul 25, 2021 10:42 pm Also, is it recommended to withdraw at 55 or better to use another account like a taxable?
Starting from the year of retirement, you will presumably have a lot less income from salary/wages. If you can do partial withdrawals from tax deferred 401k, this will let you "fill up" some lower tax brackets while your income is low and get your money out of the tax deferred account. If you don't need the money, you would want to consider Roth conversions at the lower tax brackets.
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retiredjg
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Re: Retiring year I turn 55: 401(k)

Post by retiredjg »

Vanguard User wrote: Sun Jul 25, 2021 10:42 pm Also, is it recommended to withdraw at 55 or better to use another account like a taxable?
There is no general recommendation. It depends on your situation.
Lionel Hutz
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Re: Retiring year I turn 55: 401(k)

Post by Lionel Hutz »

Here’s a summary:
Yes the “Age of 55” rule (ie no 10% penalty for distributions made if you separate the year in which you turn 55 or later), is a government rule.

Separately: there’s nothing saying your plan must allow “partial distributions”. Some only allow full distributions, some only allow regular automatic withdrawals You’ll want to confirm what your plan allows.

If your plan does not offer partial distributions, you may still utilize the “Age of 55” rule, but you must make a “100% distribution” of your 401k. In this 100% distribution, you may split the money. A portion can be a taxable distribution (10% penalty waived thanks to rule of 55), and the remainder must then be rolled over to an IRA where normal 59.5 rules apply (possibly 72t).

You’d effectively have “one shot” in the chamber with no reload :happy
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Re: Retiring year I turn 55: 401(k)

Post by Vanguard User »

MrJedi wrote: Mon Jul 26, 2021 6:19 am
Vanguard User wrote: Sun Jul 25, 2021 10:42 pm Also, is it recommended to withdraw at 55 or better to use another account like a taxable?
Starting from the year of retirement, you will presumably have a lot less income from salary/wages. If you can do partial withdrawals from tax deferred 401k, this will let you "fill up" some lower tax brackets while your income is low and get your money out of the tax deferred account. If you don't need the money, you would want to consider Roth conversions at the lower tax brackets.
Less income? But from where? If you are retiring at 55? What if the birthday is on 1/1?
MrJedi
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Re: Retiring year I turn 55: 401(k)

Post by MrJedi »

Vanguard User wrote: Mon Jul 26, 2021 1:25 pm
MrJedi wrote: Mon Jul 26, 2021 6:19 am
Vanguard User wrote: Sun Jul 25, 2021 10:42 pm Also, is it recommended to withdraw at 55 or better to use another account like a taxable?
Starting from the year of retirement, you will presumably have a lot less income from salary/wages. If you can do partial withdrawals from tax deferred 401k, this will let you "fill up" some lower tax brackets while your income is low and get your money out of the tax deferred account. If you don't need the money, you would want to consider Roth conversions at the lower tax brackets.
Less income? But from where? If you are retiring at 55? What if the birthday is on 1/1?
Yes, most people who retire usually have much less income than before retirement.
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