'Retired' at 55, 401(k) rollover?

Are you sure that her employer will allow periodic payments before 55? What happens if her employer changes hands. I think that she is better of rolling over to an IRA. At least all IRAs have the same rules, Every

401(k) is different

She is 55. Employer allows it. I lean toward rollover and use of sec 72t for 5 years. JOE

Joe,

Since she is 55 she can take withdrawals directly from her 401k without any equal payment restrictions or penalties. That is not true for IRAs.

Frank

Did we ever get a clear answer on the issue of taking funds from the LAST 401(k) only?

I have also been meeting with a client in a slightly similar situation. He is 55 and is leaving his company, but will go to work for another company across the country. He has a 401(k) with his past employer. The past employer does allow for the "age 55 sep. from service exemption". His new employer also offers a 401(k) that he can begin contributing to after 1 year of employ.

Here's the complication. The client has a loan against his previous

401(k). If he leaves the 401(k) with the company (even after his sep from service) he can continue to pay the loan monthly. But, he does not wish to leave his 401(k). Fund choices are very limited, fees are high, the 401(k) has not updated its stretch provisions, and he is a HCE that will be leaving on shaky terms to work for the competition so he is uncomfortable having to go back to the old employer when he needs service.

If he rolls into an IRA, the loan is in automatic default and is considered a distribution from a qualified retirement plan (ordinary income tax rates and potentially the 10% early withdrawal penalty). If the age 55 exception is for ANY 401(k), the distribution should not be subject to the 10%. If it is only the LAST 401(k), he may be subject because his new employers 401(k) would be his "last". Also, does it matter that at the time of the distribution (automatic loan default) his previous 401(k) would still be his "last"? He will not begin contributing to the new employers 401(k) until over a year later.

I am obviously investigating other methods of paying the loan (HEL, HELOC, long-term brokerage accounts, etc) but consider that a non- issue for now. This one is complicated enough that I would really like some definitve IRS rulings. If anybody can help, I sincerely appreciate it.

The rest of you post makes this moot, does it not? For all the reasons you state, bad fees, bad relationship with ex-employer, etc, he should roll to an IRA. He is HCE and 55 but unable to raise the cash to pay the loan back? That combination scares me. A(n) HELOC is in order, I'd think. Going to another company, he shouldn't need the 55 clause, and probably needs to step up his savings.

I know I've ignored the question, but the reasons I've quoted you are enough to bail. If I see an clearly spelled out explanation I'll post it. JOE

He's moving across the country so alot of his liquid funds are tied-up in upcoming one-time expenses. He has about $40k in available cash, but he doesn't deem the situation "dire" enough to access it. Also, he has not long been an HCE.

He is going to be taking out a mortgage on his new residence, so this is probably an excellent time to get a HELOC with little or no closing costs. That's the direction we've been pushing, but I still like to explore all of his options. The loan is roughly $30k and the 10% penalty only amounts to $3k, but he'll also get hit with an additional $8400 income tax liability from the "distribution".

I agree that saving $3k is not worth leaving the 401(k) with the ex- employer. However, he isn't going to be satisfied with "you may have an additional $3k tax liability at years end, but I'm not sure" He's going to want to know all the ramifications of his actions before he executes them (and rightfully so). On the other hand if I can tell him about this little known rule that he can use to save $3k, he will be very pleased.

Most importantly, I would like to find all of the details regarding the "age 55 exception" for my own edification. I imagine I will begin to run into this problem again.

Ok, the clarification was much appreciated.

From the IRS

Q) My understanding is that if I am over age 55 and default on a loan through my 401(k) plan when leaving the company, the 10% penalty is forgiven. Can you confirm that for me?

A) If you default on a loan from your 401(k) plan, you are considered to have received a distribution from your 401(k) plan. Whether or not you will have to pay the 10 percent additional tax on early distributions from 401(k) plan depends on a number of factors, including your age.

In order to avoid the 10 percent additional tax on early distributions from qualified retirement plans, the following all must be true:

• you received the distribution after you left the company; and * you left the company during or after the calendar year in which you reached age 55; and * your departure from the company qualifies as a separation from service.

In addition, you may avoid the 10 percent additional tax if you meet one of the other exceptions shown in Publication 560, Retirement Plans for Small Business, and Publication 575, Pension and Annuity Income.

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The above makes no remark on whether the client will work again, so we may have more homework. I understand the question to be this (your specifics) as well as the minor twists that may come up, such as what if your guy waits a year or two, is the 55 rule still in effect for the

401(k) from the earlier employer. I do believe the above helps your current situation. Let me know if you agree. JOE

Thanks Joe. I missed this info when reading over the IRS website. You're correct, we may have more research to do. But if taken literally, it appears future employment does not matter. The client does satisfy all of the requirements laid out by the IRS in the FAQ. Perhaps we are looking for something that is not there, because it is not a consideration.