Thursday, October 31, 2013

The Rule of 55

I had a long chat with my Fidelity retirement planner today, and I learned something that I did not know -- and which I was able to confirm on the IRS website.  If you are over 55 and retire from an employer where you have a 401k plan, you can take money out of that 401k plan without paying the 10% penalty.  (Not from other 401k plans that you may have, or from an IRA.)  You do not have to wait until you are 59 1/2.
Exceptions. The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances:
Made to a beneficiary (or to the estate of the participant) on or after the death of the participant.
Made because the participant has a qualifying disability.
Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the participant or the joint lives or life expectancies of the participant and his or her designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period.)
Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55. [emphasis added]
Made to an alternate payee under a qualified domestic relations order (QDRO).
Made to a participant for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the participant itemizes deductions).
Timely made to reduce excess contributions.
Timely made to reduce excess employee or matching employer contributions.
Timely made to reduce excess elective deferrals.
Made because of an IRS levy on the plan., or
Made on account of certain disasters for which IRS relief has been granted.
It is still subject to regular income tax treatment, but at least you do not have the stupid 10% penalty as well.  This simplifies my planning a bit.  I do not have an enormous amount in my current employer's 401k, but it means that I could use those funds as a bridge to when I reach 59 1/2.


  1. I benefit from that 'feature' too this year.

    But really, consider these rules ... then consider all the rules with respect to IRA, Roth IRA, IRA contributions when you're beyond the Roth limit, SIMPLE, Keogh, 401(k), ROTH 401(k), SEP, etc. etc.

    What kind of morons would design a system like this?

    (Oh, OK. I guess the question answers itself.)

  2. There is also the 72t program which allows you to take a prescribed distribution of substantially equal payments (there are three formulas for the payment amounts) for five years. This can be applied to any pre-tax retirement vehicle such as IRAs.


  3. I too have a Fidelity 401K account--probably started with the same employer--and I am wondering what the status of mine is as they never send me any statements and I can't remotely log in to find out. Don't have the patience for the 800 number to India. I guess I need to go into their local office and find out how many "fees" they are taking out and how poorly it's invested. You might hear more about me after I get arrested for blowing up when I find out I'm getting screwed by them.

    I'm of the opinion these managed accounts are more fraud than anything and we get it in the rear-end from the money managers while they have the money and from the IRS when we take it out.

  4. My experience so far with Fidelity has been really excellent. Way better than the JPMorgan managed 401k account that I had with a part-time employer. There was only about $20 or so in the account (I only taught there for a couple of terms), but the administrative fees wiped it out immediately.

  5. I'm a bit young to retire, and absent social security, I'm not financially positioned to retire.

    But I'm becoming increasingly nervous that the government is going to "help" me by replacing my personal retirement accounts with mandatory negative-when-adjusted-for-inflation interest rate bonds.

  6. What? The same government that shows how it cares about your health with the Unaffordable Care Act might confiscate your savings? How could that happen. :-)

    I confess that this is a reason that I am tempted to pay off the house. They aren't likely to start confiscating houses, and if they do, that might actually provoke some upset from the sheeple.