Author Topic: Transferring IRAs into 401k prior to age 55 to access prior to 59.5  (Read 581 times)

Katmandew

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Hi everyone.  New to MMM, and wish I would have found it years ago!  Question:  My company's 401k plan permits transfers in from IRAs.   I plan to retire in the year I turn 55, and begin accessing my retirement account.  Are there any good reasons why I shouldn't transfer my IRAs to my 401k, thus allowing me early access to those funds as well?  If so, are there any time limitations or anything else I should be aware of?  Thank you in advance.

ILikeDividends

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Re: Transferring IRAs into 401k prior to age 55 to access prior to 59.5
« Reply #1 on: October 06, 2018, 04:54:33 PM »
Hi everyone.  New to MMM, and wish I would have found it years ago!  Question:  My company's 401k plan permits transfers in from IRAs.   I plan to retire in the year I turn 55, and begin accessing my retirement account.  Are there any good reasons why I shouldn't transfer my IRAs to my 401k, thus allowing me early access to those funds as well?  If so, are there any time limitations or anything else I should be aware of?  Thank you in advance.
ETA: Partly misleading information stricken due to irrelevance to the OP's circumstances.

Hmm.  My understanding is that a 401K suffers the same penalties as an IRA for early withdrawals:

https://www.personalcapital.com/blog/retirement-planning/can-withdraw-401k-ira-penalty-free/

So that's one reason to reconsider.

Another argument against rolling your IRA into your 401K, is that many 401Ks have an extremely limited, and sometimes more expense-laden, choice of investment options than an IRA held at a brokerage.  It all depends on your specific employer's plan.

All things being equal, I would keep the two accounts separate until you retire, and then roll the 401K into an IRA when you stop working.

Do you have other accounts, either taxable or Roth*, that can fund your lifestyle between ages 55 and 59-1/2?  If you do, you should be in pretty good shape to stay on plan.  Keep in mind that you can only withdraw contributions from a Roth penalty free before 59-1/2**.  Gains in a Roth are still subject to penalty before then.

*Caveat: Personally, I would want to keep any Roth account for as long as possible before drawing it down.  YMMV.

**Caveat: Other qualifiers apply.  Google "Roth 5 year rule" for more info.
« Last Edit: October 07, 2018, 12:38:32 AM by ILikeDividends »

PDXTabs

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Re: Transferring IRAs into 401k prior to age 55 to access prior to 59.5
« Reply #2 on: October 06, 2018, 05:34:51 PM »
Hmm.  My understanding is that a 401K suffers the same penalties as an IRA for early withdrawals:

https://www.personalcapital.com/blog/retirement-planning/can-withdraw-401k-ira-penalty-free/

They do, except when they don't:

The IRS Rule of 55 allows an employee who is laid off, fired, or who quits a job between the ages of 55 and 59 1/2 to pull money out of his 401(k) or 403(b) plan without penalty. This applies to workers who leave their jobs anytime during or after the year of their 55th birthdays. - What Is the Rule of 55?

ETA: I'm not aware of a time limit, but I'm 35, so I'm not the person to ask.

ILikeDividends

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Re: Transferring IRAs into 401k prior to age 55 to access prior to 59.5
« Reply #3 on: October 06, 2018, 05:37:54 PM »
@PDXTabs, excellent point.  I stand corrected.

With that, I would modify my criteria, and ask, "can I fund my lifestyle between ages 55 and 59-1/2 with what's already in the 401K?"

There might still be a good argument to keep the two accounts separate until 59-1/2.
« Last Edit: October 06, 2018, 05:47:07 PM by ILikeDividends »

Zaga

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Re: Transferring IRAs into 401k prior to age 55 to access prior to 59.5
« Reply #4 on: October 06, 2018, 05:38:06 PM »
I would disagree, there's a rule that you can withdraw from a 401-K between age 55 and 59 if you retire with the 401-K and make equal periodic payments.

You should look up the exact rules for those payments, and make sure they will be what you need.  The IRS has rules in place for the % you can withdraw each year in this way.  Plus, once you start you are locked in until you turn 59.5.  Don't start something that you might need to change before then.

The biggest argument against is as the PP said, you might have poor high cost choices in your 401-K.  If your choices are good then this could be a good strategy.

lhamo

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Re: Transferring IRAs into 401k prior to age 55 to access prior to 59.5
« Reply #5 on: October 06, 2018, 05:52:39 PM »
I would disagree, there's a rule that you can withdraw from a 401-K between age 55 and 59 if you retire with the 401-K and make equal periodic payments.

You should look up the exact rules for those payments, and make sure they will be what you need.  The IRS has rules in place for the % you can withdraw each year in this way.  Plus, once you start you are locked in until you turn 59.5.  Don't start something that you might need to change before then.

The biggest argument against is as the PP said, you might have poor high cost choices in your 401-K.  If your choices are good then this could be a good strategy.

Many plans that allow withdrawals penalty free if you separate from sevice at age 55+ do NOT require you to take Substantially Equal Periodic Payments (SEPPs, allowed under IRS rule 72t). That is why rolling existing IRAs into a 401(k) plan that allows such distributions can be a highly preferred strategy. No penalties, no required withdrawals or set amounts. But you do have to check the plan rules to be sure. In my DHs case, he would have needed a medallion signature for anything over $10k distributed at one time, but otherwise no restrictions. We didn't end up needing to access his retirement funds yet, but it was good to know we had the option

PDXTabs

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Re: Transferring IRAs into 401k prior to age 55 to access prior to 59.5
« Reply #6 on: October 06, 2018, 05:55:17 PM »
I would disagree, there's a rule that you can withdraw from a 401-K between age 55 and 59 if you retire with the 401-K and make equal periodic payments.

That sounds like a 72T, which you can use at any age and with an IRA if you wish. If you actually retire* between 55 and 59.5 with a 401K you can withdraw funds without penalty and without the hassle of SEPP. I'm surprised this isn't common knowledge. I have a friend that just did it.

* - In the eyes of the IRS.
« Last Edit: October 06, 2018, 05:58:12 PM by PDXTabs »

Zaga

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Re: Transferring IRAs into 401k prior to age 55 to access prior to 59.5
« Reply #7 on: October 06, 2018, 07:11:23 PM »
Thank you for correcting me!

hdatontodo

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Re: Transferring IRAs into 401k prior to age 55 to access prior to 59.5
« Reply #8 on: October 06, 2018, 07:43:23 PM »
I would disagree, there's a rule that you can withdraw from a 401-K between age 55 and 59 if you retire with the 401-K and make equal periodic payments.

That sounds like a 72T, which you can use at any age and with an IRA if you wish. If you actually retire* between 55 and 59.5 with a 401K you can withdraw funds without penalty and without the hassle of SEPP. I'm surprised this isn't common knowledge. I have a friend that just did it.

* - In the eyes of the IRS.
I think with the 401k age 55 rule, it has to be the 401k account from the employer you separated with at 55. Correct me if incorrect.

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ILikeDividends

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Re: Transferring IRAs into 401k prior to age 55 to access prior to 59.5
« Reply #9 on: October 06, 2018, 08:31:30 PM »
Totally off-topic, but this whole thread illustrates an abject abdication of certain duties of the public school system, by ignoring such critical topics in the curriculum.  Tax, estate, and retirement planning, should be required material no later than when algebra is introduced.

Who, among us, is not likely to require knowledge in any one of those circumstances?

It's painfully ironic that public schools are funded by tax receipts.

</RANT>
« Last Edit: October 07, 2018, 01:22:47 AM by ILikeDividends »

terran

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Re: Transferring IRAs into 401k prior to age 55 to access prior to 59.5
« Reply #10 on: October 07, 2018, 07:59:36 AM »
You all may already know this, and someone may have already said it in this thread and I just missed it, but just in case... While the IRS allows penalty free early withdrawal from workplace retirement plans when you separate from service in or after the year you turn 55, it does not require it. This is up to your particular plan, so just make sure that your particular plan allows it before relying on the "rule of 55."

Assuming your plan allows it my only other concern would be what the investment options are like in your plan. If they're good, go for it, if they're not so good I would only what enough in the plan to last the 4.5 years between retirement and 59.5 when you'll be able to make penalty free withdrawals from all retirement accounts.

Scandium

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Re: Transferring IRAs into 401k prior to age 55 to access prior to 59.5
« Reply #11 on: October 09, 2018, 08:38:17 AM »
Totally off-topic, but this whole thread illustrates an abject abdication of certain duties of the public school system, by ignoring such critical topics in the curriculum.  Tax, estate, and retirement planning, should be required material no later than when algebra is introduced.

Who, among us, is not likely to require knowledge in any one of those circumstances?

It's painfully ironic that public schools are funded by tax receipts.

</RANT>

Equally off-topic; can we really demand/expect the public school system to teach all citizens every minor, little thing they will ever need? Is it not reasonable that we expect adults to figure out some major life decisions on their own? For a normal retirement you don't really need to think much about that until you're 30, yet we need the stressed public school system to teach this to 10 year olds?? Because it's too much to ask 30 year old adults (many who are homeowners and parents to multiple children) to take a few hours and learn about the largest financial concerns of their lives??  If anyone tells me they're caught up on game of thrones (~70 hrs of TV?), but "don't have time to learn about investing for retirement" I know they're full of s*@% (i.e. most people).
/RANT