[Rachel]

Rule of 55 question.
My understanding is that not all 401k plans allow for the rule of 55 and that I need to call the plan administration company to inquire about this (Fidelity).

Do I literally ask if my plan allows for the Rule of 55?

Or is there some other verbiage I need to use so they know what I’m talking about.

Thanks!

[Joel]

Rule of 55 does not need to be explicitly spelled out in your 401(k) plan for you to make use of it. The Rule of 55 is actually an exemption from the 10% early withdrawal penalty.

Normally the custodian of an employer sponsored retirement plan is aware of your age for the year of your distribution.

As such, they should place a Code 2 in Box 7 of your 1099-R, indicating that an exception applies that exempts you from early withdrawal penalties.

However, if the custodian fails to put Code 2 in Box 7 and instead indicates a Code 1 and refuses to correct it, you will be required to complete Form 5329.

On Line 2 of Form 5329, you can claim the Rule of 55 by entering exemption Code 01 on Line 2 of this Form.

With all that said, 401(k) plans that make Rule of 55 distributions difficult usually do so by blocking partial distributions before you turn 59 1/2.

Forcing a full distributions means you must withdraw everything from the 401(k) all at once.

But not all is lost in this scenario – but it may make things difficult or somewhat more costly.
Here are some ways to still claim Rule of 55 when partial withdrawals are not permitted:

Withdraw everything and then deposit what you do not need back into a Traditional IRA.

Since 401(k)s must withhold at least 20% for taxes, this can create cash flow problems. But if you withdraw the funds in December, you may be able to get a refund as early as late February.

However, returning the funds to a Traditional IRA is known as a 60-day rollover because you only have 60 days to make the deposit, so there may be issues filling in the gap.

If your plan supports 401(k) loans, you can take up to $50K from your 401(k) account in a loan before you separate from service.

If you don’t repay the loan, it will become a deemed distribution. This lets you effectively take one partial distribution from the plan before you need to resort to the full distribution.

How much you can take is also capped at $50K.

If your plan support Roth contributions (or In-Plan Roth conversions) you may be able to rollover the Roth subaccount(s) separately and at different times.

Distributions from a Roth 401(k) subaccount don’t really enjoy a useful benefit from the Rule of 55, so it’s always best to rollover these funds to a Roth IRA regardless.

But once in the Roth IRA, you can remove any contributions and non-taxable Roth conversions (Mega backdoor Roth 401(k) contributions) without taxes or penalties.

Also, taxable conversions can be withdrawn after 5 years penalty free as well.

These methods along with a combination of the usual strategies of SEPP [Substantially Equal Periodic Payments, aka 72(t)] distributions and Roth IRA conversion ladders as well as taxable brokerage savings could be used to bridge the gap until you are 59 1/2.

Worse case you may need to retire at 56 or 57 or you may need to pay taxes on a couple of years worth of expenses all at once.

While plans that lack partial distributions prior to 59 1/2 do appear to try to discourage earlier retirement, this strategy can never be 100% effective because blocking a full distribution of funds is never permitted.

BTW, if you have company stock in your 401(k) plan, be sure you also understand NUA distributions.

Depending on how your company’s stock has done during your tenure, this could save you a lot of money on taxes if exercised correctly.

[David]

Asking about the Rule of 55 should be good enough. You will also want to check with your company benefits department for specifics on their distribution policy.

The front line HR person may have no idea what you are talking about and some up the chain digging might be needed.

Even though I was in HR, I found most of my benefits peers knew nothing about the rule of 55.

[Karen]

The rule of 55 exempts a distribution from the 10% early withdrawal penalty if you separate from service in or after the year you turn age 55.

It’s not a plan-specific provision, because the 10% penalty is an IRS requirement, not a plan-specific requirement.

Here is the Special Tax Notice that all plans have to provide before taking a distribution – almost all plans use this exact language since this is the model notice.

[Lori]

Same. I called Fidelity. (After my HR didn’t know.) Rep didn’t know what I was talking about.

Finally I found the Summary Plan Discription in my account and searched for “55” and found one little sentence confirming it.

It didn’t say Rule of 55, just that if I separated in/after the year I turned 55, I could take it.

[Priya]

Ask the plan admin if employer’s plan allows access to 401k funds in the year you turn 55 or later if you retire at that time.

You have to retire from that company and keep the funds in the 401k

[Amy]

Your employer is required by ERISA to make available to you a Summary Plan Description. This is a document that explains in clear language all details of how your plan works.

If your plan supports Rule of 55, the SPD will indicate that (though it may not call it “Rule of 55”). Even if someone verbally tells you it’s supported, I would confirm it’s in the SPD.

If your company has a good internal website the SPD may be available for download on the HR web page otherwise you may have to ask HR for it.

[Bill]

I would ask it the way you suggested. If they don’t know what you’re talking about, that’s a problem.

If you encounter that, perhaps rephrase it to ask if the plan allows for penalty-free distributions if you separate from employment in the year you turn 55.

[Candy]

Be sure to ask if you can take partial withdrawals (and if there are any limits to frequency) or if you need to withdraw one lump sum.

We have called Fidelity 3 times and it’s a bit scary that we did not get the same answer each time.

We finally found the SPD.

[Valerie]

I have fidelity and I asked about rule of 55 had no issues they were able to answer

[Paul]

They may not be much help though. I have Fidelity also, as our plan administrator. We have an annual meeting with them where somebody from Fidelity comes in and explains everything.

When I asked the lady if it was an option through our company plan, she didn’t know what I was talking about.

After I explained it to her, she let me know it wasn’t an option with our plan.

Still not sure if she was just blowing me off or not, but was shocked she never heard of Rule of 55.

[Doug]

I have fidelity, the SPD was very vague on rule of 55. It took a number of calls/e-mails to verify.

They did eventually send me a “Participant Distribution Notice” that was more explicit.

The main caveat with partial withdrawals was that it only allowed 4 per year, which is still manageable but definitely not stated in the spd.

[Author]

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