Rule of 55 (Again)

[Louisville]

I hope someone can help me out. Maybe my google fu is lacking, but I can't find this. I can call my provider of course, but I'd like some independent verification.
I am leaving my job on April 15, and I'd like to take a portion out of my 401k under the auspices of rule 55. The bulk will be rolled to my IRA.
It would be better, for taxes, if I did this transaction next year. How long after my actual job separation date can I "do" rule of 55?

[terran]

The so called rule of 55 is an exception to the 10% early withdrawal penalty when withdrawals are made from a qualified plan like 401(k) if you separate from service with an employer in or after the year you turn 55. See Topic No. 558 Additional Tax on Early Distributions From Retirement Plans Other Than IRAs. There's no time limit to when the withdrawal is made, but it does need to come from the qualified plan, not from an IRA into which you've rolled the qualified plan.

Rollovers aren't subject to the early withdrawal penalty, so if your 401(k) will let you make partial withdrawals or do direct rollovers of part of your balance then you could do the rollover to IRA at any time. If the investment options in the 401(k) are good then it might make sense to just leave it until you turn 59.5 so you can withdraw more without a penalty.

Some 401(k) plans don't allow partial withdrawals, in which case it probably makes sense to make a full withdrawal from which you keep enough to bridge the gap until you're 59.5 and roll the rest over to an IRA. This is same strategy probably makes sense if the 401(k) has poor investment options or high fees even if it allows partial withdrawals, although then you'd need to compare those costs to the added cost of making a single larger withdrawal instead of smaller withdrawals over multiple years.

Here's a good blog post on other options for accessing retirement accounts early.

[joe7886]

I'm 55 now and this will be my last full time job. If i rollover a 401k from a previous employer into my current 401k , are there any negative consequences when i eventually withdraw money before 59.5?

[terran]

You'll be subject to the withdrawal rules and the fees of your current employer, but the rule of 55 only applies when you withdraw from the 401(k) of the employer you left in or after the year you turn 55.

[joe7886]

You'll be subject to the withdrawal rules and the fees of your current employer, but the rule of 55 only applies when you withdraw from the 401(k) of the employer you left in or after the year you turn 55.

i got that part, it's the rollover from the prior employer that i'm concerned about. Are there any negative consequences? if there is i won't do it.

thanks

[MDM]

You'll be subject to the withdrawal rules and the fees of your current employer, but the rule of 55 only applies when you withdraw from the 401(k) of the employer you left in or after the year you turn 55.

i got that part, it's the rollover from the prior employer that i'm concerned about. Are there any negative consequences? if there is i won't do it.

Not if the prior employer's rules and fees are no better than the current employer's.

[terran]

You might (will probably?) be out of the market during the rollover, so there's that. You could consider moving most of your bond allocation to the old employer 401(k) (which is to say, invest most other accounts in stocks) since the difference between bonds and cash is less than the difference between stocks and cash.