Scenario 1: Say a person expects to turn age 50 in December of 2024. Can that person make catch up contributions to a 401(k) and an IRA throughout calendar year 2024 for plan year 2024, or just after formally turning age 50 in December?
Scenario 2: Say a person expects to turn age 55 in December of 2024. If that person’s employer offers that person early retirement effective June, 2024, can that person use the age 55 rule to take penalty free 401(k) withdrawals? And if so, when can those withdrawals begin?
Hey Chuck, You can begin withdrawals the calendar year that you turn 55. But the key is you have to leave the money in the 401k until you hit 59 and a 1/2. If you move it from your 401k before hand the 55 rule no longer applies. I was with Schwab and my wife was with Fidelity when we started doing it. If you are with either one of them you can talk to them and they will walk you through it. What was amazing is that I found out from Fidelity that most plans allow this type of withdrawal. There are some that don’t but most do, it will be written in your plan also.
I would check with your employers plan also to make sure I have everything correct. Congratulations though, Retirement is great, although it really isn’t retirement, it’s just being able to do what you love.
The law allows anyone who will be 50 by Dec 31 of that year to make catch-up contributions for that year. With IRAs, that’s easy, since you control the contributions. With 401(k)s, your plan may have rules that are more strict, so you would need to read your SPD (Summary Plan Description) to get the plan rules on how catch-up contributions can be made to the 401(k).
The law requires that you leave service with the employer who sponsors the 401(k) “in or after the year you turn 55”, so under the scenario outlined, the person would be allowed to use the rule of 55.
Each plan has their own rules on how the rule of 55 withdrawals can occur - so you would need to look at the SPD for that specific plan to understand when and how. For instance, some plans require that you set a specific monthly or quarterly amount or percent.
I will also point out that it’s best not to use the rule of 55 to take withdrawals from a Roth account in your employer plan. That’s because employer plans do not follow the ordering rules for Roth IRA withdrawals. By law, all employer plan Roth account withdrawals include both earnings and contributions on a pro-rata basis. The rule of 55 gives you an exemption from the 10% early withdrawal penalty, but, for Roth withdrawals, does not eliminate the tax that is imposed on withdrawal of earnings before age 59 1/2 That means that anyone taking rule of 55 Roth account withdrawals will be paying taxes at ordinary income rates on part of their withdrawal - which is probably not what they intended when they put the money into a Roth account. This is one more reason why it’s not always a good idea to have all of your tax-sheltered accounts be Roth accounts.