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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25265  
Subject: Re: 55 year old rule Date: 6/10/2013 9:52 PM
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I've been maxing out my 401k since 1997 at the same company/401k plan, and plan to continue until I'm 45 in 2019. Then I'd like to take about 5+ years off, and then come back to work at 50 or maybe a little later and work until 55 then fully retire.

I think it's a huge risk to assume you will be able to just step back into a job after 'taking off' 5 years. How are you going to support yourself from 45 - 50? Why not just work until you are 49 or 50, and then use the same strategy to support yourself until you reach 59 1/2?

(Assuming my company is still around and willing to hire me)

Unless you actually own the company, or have something else to offer your company that nobody else can, AND that they won't decide that they can live without after 5 years, that's a HUGE assumption.

I'm assuming even if I came back to work for one day at the age of 55 and quit, I'd be eligible for penalty free withdraws. (Without having to use SEP withdraws).

Here is the IRS requirement, from Pub 575:

Separation from service. In order to meet the requirements for the first exception in the list above, you must have separated from service in or after the year in which you reach age 55 (or age 50 for qualified public safety employees). You cannot separate from service before that year, wait until you are age 55 (or age 50 for qualified public safety employees), and take a distribution.

Example. George separated from service from his employer at age 49. In the year he reached age 55 he took a distribution from his retirement plan. Because he separated from service before he reached age 55, he did not meet the requirements for the exception for a distribution made from a qualified retirement plan (other than an IRA) after separating from service in or after reaching age 55 (age 50 for qualified public safety employees).


The question is - what would your employer consider to be 'long enough' service to have worked so you could 'separate' from service? And would that also be long enough for you to be eligible to participate in the 401(k)? I know that after a break of more than 1 year in employment, my employer would not count my previous service toward 'vesting' service, and I would have to start over to be eligible for the 401(k) again. So in my case, it would probably take at least 1 full pay period (half of a month) in order to re-establish my 401(k) participation. Depending on when during the month I re-started my employment, it might actually take a full month (2 full pay periods).

Curious if there is some sort of length of employment requirement beyond just being over 55 when one retires.

Depends on the 401(k) plan rules, and your employer's rules. But it's any time during the calendar year you turn 55, not actually turning 55. So if your birthday is in December, you could be as young as 54 and a few days and still meet the requirements, assuming yout last day of employment is in early January of the year that you will turn 55. On the other hand, if your birthday is in January, you are going to either be 55 or pretty close to it in order to be able to use this rule.

My alternative is SEP but looking for other options.

Actually, your alternative is SEPP (Substantially Equal Periodic Payments) aka 72(t) payments, not SEP (Simplified Employee Pension). That said, taxable accounts would be a great alternative, as you don't have to be any particular age or meet any particular service requirements to make withdrawals from those. Or if you have a Roth IRA, you could take out the contributions at any time without having to pay any penalties or taxes.

AJ
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