401k -- rule of 55

[Elan]

Anyone have experience with this? I've read extensively and I understand the following:

1)Must be 55 or older.
2)Must be currently enrolled in plan that allows early, penalty free, withdrawal.
3)Must stay in employer's plan -- cannot roll to IRA -- until age 59.5.

Specifically, my wife has a (larger) 401k from a previous job in addition to her (much smaller) 401k with her current employer. What I'm not clear on is whether she can roll the previous 401k into her current 401k and have access to all of the funds via rule of 55, should she leave her current job? My online research shows that both plans allow for early withdrawal, though I would obviously confirm directly before acting.





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[sue1947]

I quit/retired at 53 and used IRS rule 72t. That would allow you the option to roll the old 401K into an IRA with more choices of investments (I used Vanguard). However, it has strict rules and penalties if you screw it up so you need to be careful. This is a SEPP or substantially equal periodic payments. The most likely way to screw it up is to make a change that delays the Dec payment into Jan. The solution is to make the periodic payments annual (Jan) or semi-annual (eg Feb and July) so you have plenty of time to fix any issues AND to make the investment something you plan to hold until after age 59.5.

If your wife is already at 55, then that rule is much more flexible. If not, then look at 72t. Twenty years ago, I found 72t.net very helpful, but have no idea if it is currently as helpful.

 

[PigsDad]

I retired at 56 and used the rule of 55. I had rolled some money into my 401k from a previous employer several years back, but as I recall, it didn't matter when that roll happened, just as long as it was done before retirement. When I retired, I had access to my full balance and could withdraw any amount from my 401k without penalty, as long as I kept it in the 401k -- no rollover to an IRA.

So your wife should be fine, rolling the previous 401k into her current employer's 401k and then retiring. I do know that only the money in the 401k of your employer at the time of your retirement can be used under the rule of 55. Of course I would double check with a pro, but that is my recollection / experience.

Congrats on the early retirement!

Kurt

 

[Elan]

Yes, I should have clarified that my wife is already 56, so age is a non-factor.

My interpretation, which I believe agrees with Kurt's input, is that we just need to roll her old into her new, and ensure that the new plan allows for early withdrawal via "rule of 55", as I understand that aspect can be plan/employer dependent.

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[Timeshare Von]

My personal use of the Rule of 55 was back in 2011, when I cashed out my employer's IRA about 90 days after I terminated from them . . . and didn't have to pay the penalty for an early withdrawal before 59 1/2. Sorry I can't help you out.

 

[TolmiePeak]

Anyone have experience with this? I've read extensively and I understand the following:

1)Must be 55 or older.
2)Must be currently enrolled in plan that allows early, penalty free, withdrawal.
3)Must stay in employer's plan -- cannot roll to IRA -- until age 59.5.

Specifically, my wife has a (larger) 401k from a previous job in addition to her (much smaller) 401k with her current employer. What I'm not clear on is whether she can roll the previous 401k into her current 401k and have access to all of the funds via rule of 55, should she leave her current job? My online research shows that both plans allow for early withdrawal, though I would obviously confirm directly before acting.





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I wouldn't roll it over to her current 401k. Much better to roll it over to an IRA with Fidelity, Vanguard, or Schwab. You can do that at any age.

 

[dioxide45]

I wouldn't roll it over to her current 401k. Much better to roll it over to an IRA with Fidelity, Vanguard, or Schwab. You can do that at any age.

The only problem is that the funds can't be taken out penalty free starting at 55. That said, if there is enough funds in the current employer's 401K to tide them through to 59 1/2, then rolling the prior employer's 401K into an IRA makes sense.

 

[sue1947]

The only problem is that the funds can't be taken out penalty free prior to age 55.

Typo alert; you meant, prior to age 59.5.

 

[Brett]

Right, easy to rollover 401k to a Schwab / Vanguard IRA at any age but to withdraw funds w/o penalty age 59.5

 

[TolmiePeak]

Typo alert; you meant, prior to age 59.5.

I believe Dioxide is correct. I'm not an expert at 401k but as a former government employee, I had 457 plan and you could withdrawal penalty free at 55.

 

[dioxide45]

I believe Dioxide is correct. I'm not an expert at 401k but as a former government employee, I had 457 plan and you could withdrawal penalty free at 55.

I updated my post. I was initially incorrect.

 

[Shiba]

I’m no tax professional, but I was educated by my father’s accountant when I told him I wanted to retire early. He explained to me that I had to work at least one day in the year I turned 55. I could begin taking out funds without penalty. He also told me I could roll over old 401k’s into my current employer account and utilize the Rule of 55 with the funds. This had to be done before I started taking funds.

One other thing to add is to check with your wife’s employer’s plan would allow the rollover and utilize the Rule of 55.

 

[PigsDad]

I’m no tax professional, but I was educated by my father’s accountant when I told him I wanted to retire early. He explained to me that I had to work at least one day in the year I turned 55. I could begin taking out funds without penalty. He also told me I could roll over old 401k’s into my current employer account and utilize the Rule of 55 with the funds. This had to be done before I started taking funds.

One other thing to add is to check with your wife’s employer’s plan would allow the rollover and utilize the Rule of 55.

That matches up exactly with what we were told by our financial advisor when we retired at age 56. Since we were "cash poor" when we retired due to buying a second home for cash just before retiring, we needed to tap into our retirement funds soon after we retired. We could have started withdrawing from our Roth IRAs without penalty, but we decided to go with the 401k funds, utilizing the Rule of 55, as our 401k met all the criteria.

At retirement, we rolled over most of our 401k funds to IRAs in order to have more flexibility with investments, and kept enough funds for us to live on for the next 3+ years in our 401k. It worked out well, and over 4 years in (we are both 60 now) we are still living off of that 401k money, allowing the IRA funds to continue to grow.

Kurt