Keep on Rolling Age 55 exception
According to the AARP website, the IRS permits an IRA containing only 401K rollover funds, to then be rolled back into a 401K. According to a retirement specialist at Fidelity, this can’t be done. It’s important to get this clarified because the 401K permits penalty free withdrawal at age 55 or over, but the IRA makes you wait till 59 1/2. I recently lost my job. I have left my 401K at my former employer, because I fear that if I roll it into an IRA, I will forever lose the age 55 option. Help!
Permalink Submitted by BruceM on Sat, 2008-07-12 15:51
You may transfer the 401(k) assets directly to a conduit IRA and maintain the integity of the 401(k), usually done to allow these assets to be passed to a new employer’s 401(k) and maintaining the unlimited protection from creditors typical of a qualified retirement plan.
However, I’m not sure if you can maintain the 10% penalty free feature you’d enjoy on withdrawals from the former employer’s 401(k) once moved to the conduit IRA. Perhaps others could speak to this.
Why not just leave the $$ in the former employer’s 401(k)? Providing you turned 55, left the employer and then made the withdrawal (in that order), you should be able to continue pre 59.5 penalty free withdrawals.
BruceM
Permalink Submitted by Joy Aronson on Sat, 2008-07-12 16:30
The problem is I’m in my early 50’s and my employer fired me. That option is gone.
Permalink Submitted by Denise Appleby on Sat, 2008-07-12 18:10
Bear in mind that the age 55 exception applies to you only if you left your employer in the year you reach age 55, or at a later age. If you left your employer at ( say ) age 52, you cannot get that exception by leaving the assets in your 401(k) until you reach age 55.
Regarding the information you received, the information on the AARP website may be outdated, or there may be additional information that clarifies further? The response from Fidelity may be based on a specific qualified plan-as- while the regulations do permit the rollovers of pre-tax amounts from [url=http://retirementdictionary.com/Conduit-IRA.htm%5Dconduit%5B/url%5Dand non-conduit IRAs, employers are not required to permit rollovers to their plans. Some employers that permit rollovers limit the types of IRAs from which rollovers are permitted. For instance, they may accept rollovers from only conduit IRAs.
Permalink Submitted by Alan Spross on Sat, 2008-07-12 23:20
If you get another job, check whether their plan will accept an incoming rollover of your former 401k account. If they do, and you do not separate from the new employer until 55, the entire balance will be subject to the age 55 exception.
However, you should also be aware that even with the penalty exception, a plan that does not allow you periodic or flexible withdrawals after you separate will probably cost you as much or more than the penalty because a lump sum large enough to support you until you are 59.5 will probably inflate your tax bracket. If that happened, you directly transfer the 401k to an IRA and start a 72t plan using substantially equal periodic payments. Those payments must satisfy an approved calculation method and continue for 5 years or until you reach 59.5, whichever is longer.
So you do have several options here to consider.
Permalink Submitted by Joy Aronson on Sun, 2008-07-13 16:29
I would like to find out if either of the following is an option – 1: roll over my 401K into a conduit IRA. At a later date, open my own 1 person company with a 401K and roll the conduit IRA into the new 401K, retire at 55 and start withdrawal without 10% penalty or 2: open my own 1 person company soon, start a new 401K, roll the old 401K into the new 401K, retire at 55 and start withdrawal without 10% penalty. The 72t distributions don’t fit my financial picture. I don’t need annual small withdrawals. I need flexibility.
Permalink Submitted by Alan Spross on Sun, 2008-07-13 21:15
You could do either of the two plans as long as your solo K is drafted to accept incoming rollovers. There is no need to go through the extra step of creating a conduit IRA to accomplish what you want here.
The area of possible question here is that the age 55 exception applies to separating employees. However, for purposes of Sec 72, a self employed person is treated as an employee and therefore the age 55 exception should apply to a solo K as well. The following is stated in Sec 401(c)(3) definitions referred to in Sec 72:
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(3) Owner-employee
The term “owner-employee” means an employee who –
(A) owns the entire interest in an unincorporated trade or business….
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