Rule of 55 question...

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WannabeBogleHead01
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Rule of 55 question...

Post by WannabeBogleHead01 »

I turn 55 in October of 2023. As I understand it, if I were to leave my current employer (where my 401k is) in January of 2023 (or anytime in 2023 or later), I can withdraw from my 401k without penalty (Rule of 55.)

My question is, what if I leave my company tomorrow, and don't have any additional work/income for the rest of 2021 and all of 2022. Am I still able to withdraw from my 401k in 2023 penalty-free? Or do I need to be gainfully employed during 2023?
sailaway
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Re: Rule of 55 question...

Post by sailaway »

You don't necessarily need to be gainfully employed, but your employer needs to consider you as employed. In effect, that often means you will need to be gainfully employed.

Moreover, does your plan allow for partial withdrawals? Without those, it can be difficult to make use of the Rule of 55.
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David Jay
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Re: Rule of 55 question...

Post by David Jay »

The Rule says you must separate from service (after your 55th birthday?). So simply earning no money after separation from service doesn’t work.

I suppose that you may be able to get your employer to keep you on the payroll, perhaps working a few hours a month or something? My company did something like this, because they did not want to lose the “organizational memory” that I provided.

Sailaway’s point is important. You need to check the 401K SPD (summary plan description) to see if partial withdrawals are permitted before age 59.5 as this will determine whether the Rule of 55 can be used as a practical matter.
Last edited by David Jay on Mon Jun 21, 2021 4:17 pm, edited 1 time in total.
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retiredjg
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Re: Rule of 55 question...

Post by retiredjg »

WannabeBogleHead01 wrote: Mon Jun 21, 2021 3:35 pm I turn 55 in October of 2023. As I understand it, if I were to leave my current employer (where my 401k is) in January of 2023 (or anytime in 2023 or later), I can withdraw from my 401k without penalty (Rule of 55.)
Yes. This is allowed but your employer does not have to make it easy. They might require a lump sum distribution of the entire plan rather than withdrawals at your convenience. So start your research with your plan..

My question is, what if I leave my company tomorrow, and don't have any additional work/income for the rest of 2021 and all of 2022. Am I still able to withdraw from my 401k in 2023 penalty-free? Or do I need to be gainfully employed during 2023?
This exception applies to the employer you retire from during or after the year you turn 55. You can't be unemployed or employed somewhere else.
student
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Re: Rule of 55 question...

Post by student »

David Jay wrote: Mon Jun 21, 2021 3:52 pm The Rule says you must separate from service after your 55th birthday. So simply earning no money after separation from service doesn’t work.
I thought it applies starting in the year of one's 55th birthday. It seems that from https://www.thebalance.com/what-is-the- ... 55-2894280 it says "This applies to workers who leave their jobs anytime during or after the year of their 55th birthdays."
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retiredjg
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Re: Rule of 55 question...

Post by retiredjg »

David Jay wrote: Mon Jun 21, 2021 3:52 pm The Rule says you must separate from service after your 55th birthday.
Someone posted the law as passed by Congress and codified in the US Code (if I'm not mistaken). Might have been you? And it did say after your birthday. I was surprised.

However, I believe it was later modified or the IRS has chosen to enforce it slightly differently - not using the birthdate but the year in which a person reaches 55. I know my retirement plan federal TSP said "during or after the year...." and the IRS publications say 'during or after the year.....

It would be nice if someone with the skills and resources would track this down for clarification.
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David Jay
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Re: Rule of 55 question...

Post by David Jay »

I am working from memory (such as it is) on this one, so do not treat my interpretation as gospel.
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dsronfire
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Re: Rule of 55 question...

Post by dsronfire »

As an early retiree (54.5) who took advantage of this rule, SPD's rule. I originally thought it was a universal rule, but a Boglehead explained to me not all plans provide this service. In my case I terminated from employer in year I turned 55 and plan (SPD) supported withdrawals without penalty.
MarkNYC
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Re: Rule of 55 question...

Post by MarkNYC »

retiredjg wrote: Mon Jun 21, 2021 4:08 pm
David Jay wrote: Mon Jun 21, 2021 3:52 pm The Rule says you must separate from service after your 55th birthday.
Someone posted the law as passed by Congress and codified in the US Code (if I'm not mistaken). Might have been you? And it did say after your birthday. I was surprised.

However, I believe it was later modified or the IRS has chosen to enforce it slightly differently - not using the birthdate but the year in which a person reaches 55. I know my retirement plan federal TSP said "during or after the year...." and the IRS publications say 'during or after the year.....

It would be nice if someone with the skills and resources would track this down for clarification.
The language in the law states "separation from service after attainment of age 55." For some reason, the IRS has interpreted this to mean at any time during the year that contains the employee's 55th birthday. I've never understood the logic in claiming that someone can "attain" age 55 up to 11 months before their 55th birthday, but it's a taxpayer-friendly interpretation. The IRS does not apply the same logic for "attaining" age 59.5, or age 70.5.
Alan S.
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Re: Rule of 55 question...

Post by Alan S. »

dsronfire wrote: Mon Jun 21, 2021 5:19 pm As an early retiree (54.5) who took advantage of this rule, SPD's rule. I originally thought it was a universal rule, but a Boglehead explained to me not all plans provide this service. In my case I terminated from employer in year I turned 55 and plan (SPD) supported withdrawals without penalty.
Not correct. The SPD cannot determine whether there is a penalty or not for distributions after separating in the year reaching 55. However, the SPD can determine whether such distributions must be lump sum distributions or otherwise restricted from totally discretionary distributions. In other words, if you separate in the year you reach 55 or later, the plan must code your distribution 1099R with exception code 2 in Box 7. And if they don't you can file a 5329 to claim the exception yourself.
IMO
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Re: Rule of 55 question...

Post by IMO »

WannabeBogleHead01 wrote: Mon Jun 21, 2021 3:35 pm I turn 55 in October of 2023. As I understand it, if I were to leave my current employer (where my 401k is) in January of 2023 (or anytime in 2023 or later), I can withdraw from my 401k without penalty (Rule of 55.)

My question is, what if I leave my company tomorrow, and don't have any additional work/income for the rest of 2021 and all of 2022. Am I still able to withdraw from my 401k in 2023 penalty-free? Or do I need to be gainfully employed during 2023?
I understand the aspect that one needs to be employed by their current employer in the year they turn 55 years old, I think the wording I've seen is if one retires at age 55.

What I'm confused about is:
a) What is someone leaves their current employer at that age, but then goes and works for another employer after leaving that job? Do you still meet the Rule of 55? Or will the IRS say you still have earned income and thus you will have to pay an early withdrawal penalty?
b) What if someone starts to work again, lets say your 57 and decided you didn't like retiring, do you still meet the Rule of 55? Do you now have to pay the early withdrawal penalty? What if you go back and work for the same employer (for example, you're a Federal Employee and got rehired)?
Lionel Hutz
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Re: Rule of 55 question...

Post by Lionel Hutz »

https://www.irs.gov/taxtopics/tc558
“ The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55…”

So if your 55th birthday is October 2023, you can terminate employment January 2023 and utilize this. But if you terminate your employment in 2022 or prior and then try to wait until 2023 or later before taking the distribution, the rule of 55 is null and void for you and the penalty will apply.

If you do it properly in 2023 or later and after terminating, the 401k custodian should generate the 1099-R with code 2 (early distribution, known exception to 10% penalty).
EdNorton
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Re: Rule of 55 question...

Post by EdNorton »

If you need money, you can rollover to IRA, and then do a code section 72(t). It's more limited as to amount as rule of 55.
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mrsgoldilocks
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Re: Rule of 55 question...

Post by mrsgoldilocks »

I am planning for early retirement and most likely I will stay with my current employer for another 10-15 years.

I asked our 401K plan administrator about rule of 55. But apparently, he said our plan only allows non-penalty withdrawal strictly starting age 59 1/2. I don't know if he never runs into anyone asking this particular question so he just answers from the top of his head, or it is for real that our company doesn't allow this.

But I suspect a lot of 401k plans don't allow this the rule of 55 as it's not mandatory by law and it is not really bringing any benefits to the company. Plus, it really may not be that many ppl wants to access their 401 saving at age of 55.
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retiredjg
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Re: Rule of 55 question...

Post by retiredjg »

The employer doesn't really have any choice. If you are retired, they must allow you to take your money. They cannot hold on to it just because you are not yet 59.5.

Where they do have a choice is how you take your money. Some will allow withdrawals at your convenience (yay! for the rule of 55) and some say you have to take the entire lump sum. This second option makes the "rule of 55" pretty moot since nobody wants to pay taxes on the lump sum.
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retiredjg
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Re: Rule of 55 question...

Post by retiredjg »

mrsgoldilocks wrote: Tue Jun 22, 2021 8:29 am I asked our 401K plan administrator about rule of 55. But apparently, he said our plan only allows non-penalty withdrawal strictly starting age 59 1/2. I don't know if he never runs into anyone asking this particular question so he just answers from the top of his head, or it is for real that our company doesn't allow this.
What you need to ask about is withdrawal options upon retirement. See if there are flexible withdrawals rather than "must take it all".
mrsgoldilocks
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Re: Rule of 55 question...

Post by mrsgoldilocks »

retiredjg wrote: Tue Jun 22, 2021 9:11 am
mrsgoldilocks wrote: Tue Jun 22, 2021 8:29 am I asked our 401K plan administrator about rule of 55. But apparently, he said our plan only allows non-penalty withdrawal strictly starting age 59 1/2. I don't know if he never runs into anyone asking this particular question so he just answers from the top of his head, or it is for real that our company doesn't allow this.
What you need to ask about is withdrawal options upon retirement. See if there are flexible withdrawals rather than "must take it all".
Thanks. I will go for it.
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