Vanguard Solo/Individual 401k - rule of 55

[johnhenry]

Anyone here have a Vanguard Individual 401k and know whether they allow rule of 55?

I don't know much about the rule of 55, but my spouse and I each have an Individual 401k with Vanguard from a little side business.

We are still a long way from 55, so our plans are still pretty vague.  We both also have Trad and Roth IRAs with Vanguard and I always assumed that we would eventually roll over (in the next few years) our workplace 401ks (one is actually a SIMPLE) to our Traditional IRAs, just to get them under our own control of funds etc. 

I'm wondering out loud if rolling those workplace plans to our Individual/Solo 401ks at Vanguard would make more sense, just to keep more options on the table regarding the potential down the road to access the funds at 55. 

If the Vanguard Individual 401k plan already allows rule of 55, then that works.


If Vanguard Individual 401k plan does not allow rule of 55, then either:

A) sometime before 55, find another Individual 401k administrator besides Vanguard that does allow, and roll the plans there
    (If Vanguard Individual 401ks do not allow, does anyone know of ones that currently do?)

B) If necessary and possible, find work with 401k plan that allowed rule of 55 and roll over (that person's) Individual 401k to the new company plan.  (I'm also not up on whether a rollover like that must be allowed by the employer, or whether it's at their discretion.)


Admittedly, this isn't something that is a critical part of our retirement plan.  But if rolling to our Individual 401ks instead of our Trad IRAs leaves favorable options potentially on the table, it seems like a good way to go.

Anyone aware of any downsides of rolling over to the Individual 401ks instead of IRAs?

My understanding is that if the workplace accounts get rolled over to our Traditional IRAs, there would be no way to roll them over to a plan that would allow access at 55, even if we got access to one around that time.

[MustacheAndaHalf]

Apparently "rule of 55" refers to an IRS ruling allowing certain people to take distributions starting at age 55.  Since it's IRS related, the people on the "taxes" forum probably know it better.

[terran]

A plan doesn't allow or not allow the rule of 55, that's simply an IRS rule (or maybe a federal law) regarding the tax treatment of withdrawals made from a workplace plan sponsored by an employer from which you separate from service in or after the year you turn 55. Here's a Boglehead thread on the topic of using the rule of 55 with a solo 401(k) to which I replied (see the first response). I stand by that response, the short version of which is how can you claim to have separated from service (rule of 55 requirement) from a business of which you're the only employee (solo 401(k) requirement) while also claiming that the business that can sponsor a solo 401(k) continues to exist despite having no employees?

The idea of getting a job with a good 401(k) that you'd like to leave your money in, rolling over your solo 401(k) (if the new plan allows it) then quitting in the year you turn 55 could work, but I wouldn't bother when there are a number of other ways to access money in retirement account. Finding and employer with a good plan, asking all the necessary questions without tipping your hand, getting the job, whatever moral ambiguities are involved in taking a job someone else actually wants/needs, and quitting shortly after taking the job (probably after you've completed some training but before the employer gets much productive work out of you) just seems like a hassle.

[johnhenry]

A plan doesn't allow or not allow the rule of 55, that's simply an IRS rule (or maybe a federal law)

OK, yes the employer 401k plan can't have a position on the IRS "rule of 55", but it can have age and/or partial distribution limitations that would effectively negate the ability to utilize the rule of 55.

how can you claim to have separated from service (rule of 55 requirement) from a business of which you're the only employee (solo 401(k) requirement) while also claiming that the business that can sponsor a solo 401(k) continues to exist despite having no employees?

My spouse and I are both employees of the business and participants in the same Individual 401k (separate accounts of course).

Is it possible for one spouse to remain employed, while the other separates from service (retires)?  I would think so.

Of course as we approach 55, many options are on the table:
1) one spouse continue to work as employee while the other does not.

As owners, we may choose to stop working as employees, but continue management while:
2) the business hires additional(or other) employees besides the spouse, at which point the owner spouses would not be eligible for Individual 401k contributions
3) the business operates with no employees, with all additional work paid to contractors rather than employees.
4) the income of the company dwindles to $0 or close to $0

Anyway, the point is there are many legitimate (and likely common) reasons that a business sponsoring an Individual 401K plan for owners may have a change in status that would not allow Individual 401k participation/contributions. But contribution eligibility is a separate question than whether the Individual 401k plan allows partial distributions before age 59.5, which is more precisely what I've asked about Vanguard (or other self directed) plans. 

I understand there may be a separate question in play about how long an active (or possibly dormant) business may continue to sponsor/maintain an Individual 401k plan for owners who don't make contributions, either due to choice or being ineligible at the business or individual level.

And without getting this conversation too far in the weeds:  If a company owned and operated by two 55 year old spouses all of a sudden hires a third employee and becomes ineligible for owner Individual 401k contributions then the owners would not make any contributions to that plan after the business/they became ineligible.  But what happens when after 2 years when the employee leaves and one spouse decides go back to work for the business as an employee, but the other spouse wants to start (or continue) to take distributions?  Were the owners under some obligation to terminate or dissolve the Individual 401k plan when they first hired the employee and became ineligible for contributions? On day 1?  After 30 days?    And then be required to start a whole new plan when the spouse restarted employment?

I know from experience that we have maintained our Individual 401k plan at Vanguard through periods of 2 consecutive tax years with no contributions.  No account dormancy or other letters from Vanguard arrived or letters from the IRS.  Of course that doesn't mean we've done everything right and won't run into trouble later.

I hope no one here interprets these scenarios as evasive of the law.  As far as I'm concerned, these are all real possible scenarios that may be considered or encountered by spouses operating a small business.

Again, I'm not arguing that this is possible.... I'm looking for the specifics on why not... or if so, what requirements would need to be met to make it happen.

but I wouldn't bother when there are a number of other ways to access money in retirement account.

Ya, I take your point.  And I'll be the first to admit that this "option" is far more likely to be "worth the hassle" with a self-directed Individual 401k rather than finding an employer and plan with all the stars aligned.

But I'm here to hash out whether it's possible, and if so find out what the restrictions/requirements are to make it happen. Once I know that, I'll be able to compare it to the other options.  All of those other options require some level of hassle as well. 

[johnhenry]

In our case, the business that sponsors/maintains the Individual 401k plan is a sole proprietorship with it's own EIN.

There is no Corporation or LLC that needs to be maintained, registered annually.

[johnhenry]

This is not a legal take, just a logical one.  I see the difficulty in claiming that "a separation of service" occurred between an individual taxpayer and a sole proprietorship that is essentially that person.  However it seems nearly as illogical to claim that a separation of service has not occurred if the individual has essentially retired from their sole proprietorship in the same manner they may have retired from a more traditional job.

If the EIN/business is tied to the SSN of one spouse or the other, it seems harder to make the claim that it's "impossible" for one spouse to have "separation of service" from the business when the sole proprietorship is tied to their spouse's SSN.

[LightStache]

This is not a legal take, just a logical one.  I see the difficulty in claiming that "a separation of service" occurred between an individual taxpayer and a sole proprietorship that is essentially that person.  However it seems nearly as illogical to claim that a separation of service has not occurred if the individual has essentially retired from their sole proprietorship in the same manner they may have retired from a more traditional job.

It doesn't seem illogical to me. When an employee of a corporation retires, that corporation continues to operate and maintain the 401k plan as the sponsor. If a sole proprietor "retires," the business ceases to operate and therefore there's no plan sponsor, so the business has to terminate the plan before that happens. Since the plan has to be terminated before you separate from service, you can't take withdrawals from it after you separate.

For that reason I don't think this would fly: http://gubmints.com/2017/05/15/retire-early-using-the-solo-401k-parachute/

The rules for a one-participant 401K plan kind of nullify the rule of 55.

If the EIN/business is tied to the SSN of one spouse or the other, it seems harder to make the claim that it's "impossible" for one spouse to have "separation of service" from the business when the sole proprietorship is tied to their spouse's SSN.

Yes it makes sense that the employee spouse (not the sole proprietor), could separate from service while the sole proprietor continues to operate the business and sponsor the plan, allowing the separated spouse to take penalty-free distributions only from their own account.

I'm not sure that would be entirely risk free though, but it's an interesting work-around.

And without getting this conversation too far in the weeds:  If a company owned and operated by two 55 year old spouses all of a sudden hires a third employee and becomes ineligible for owner Individual 401k contributions then the owners would not make any contributions to that plan after the business/they became ineligible.  But what happens when after 2 years when the employee leaves and one spouse decides go back to work for the business as an employee, but the other spouse wants to start (or continue) to take distributions?  Were the owners under some obligation to terminate or dissolve the Individual 401k plan when they first hired the employee and became ineligible for contributions? On day 1?  After 30 days?    And then be required to start a whole new plan when the spouse restarted employment?

Yes, I would recommend terminating the plan prior to hiring an employee. If you left the plan active after hiring a non-spouse employee, regardless of whether the owners contributed, I think the plan terms would likely violate ERISA non-discrimination provisions. Besides, it's free to terminate the plan, roll to an IRA, and then reverse that once the employee leaves.