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I've researched this a bit and would like to get some input.

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

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).

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

My alternative is SEP but looking for other options.

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whyohwhyoh
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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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I think aj covered it very well, but let me add a point.

After age 50, many find it difficult to find a job. Usually employers are reluctant to train people after age 50. Most often the work you find is in a field where you have much experience and often you are hired by someone who knows you personally.

There can be exceptions. If you work in a shortage field. If you have unique experience that is in demand.

But often you are in competition with young people who have say 10 yrs experience and are willing to work cheaper. What do you bring to the party? Plus after 5 yrs away from your specialty will you still be up to date and employable?
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I guess it depends on what OP does. If he has a skill set where experience, even after 5 years, is in demand, then they may have reasonable expectations of reemployment, even at age 50.

I had a co-worker during my years at Turner Broadcasting who we (he and I) jokingly called the keeper of dead technologies. His role was to maintain legacy systems that were more expensive to replace than to keep him on payroll to keep alive.

Taking a page out of his book, one of the reasons I have been able to make a living as a Business Intelligence Reports Developer is that many companies have a heavy investment in Crystal Reports templates and need contractors to come in every now and then to maintain these reports or write new ones.

Fuskie
Who notes the trick is to have a niche skill or level of experience that will remain in sufficient demand after the interval of employment avoidment...
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Thanks for all the comments. I've been looking around for someone who actually executed on this strategy. So far it looks plausible.

I'd like to take a break at 45 to spend some time with my kids before they start into high school, then likely start working once they are off to college, or at least one of them. Possibly my wife will start working, several options. Maybe never go back.

At 45 I will have been at the same company for 22 years, and targeting about 1E6 in 401k+Roth and 0.4E6 in taxable accounts&cash and ~0.6E6 in house net worth but don't want to sell until the kids are gone for awhile. (Not much in Roths, as we haven't been eligible for many years). So at 45 we'll have quite a bit of NW tied up in home NW and my 401k.

I am quite skilled in what I do, although if I do reenter it would likely be at a somewhat reduced pay scale (as in my line of work a good portion of income is delayed somewhat LTI etc). This I could handle, as I just need a few more years to get by until I could more easily tap that 401k at 55. It would be a gamble, but worst case I find a job at another company and wait till 59.5 ( or stop a bit early and use SEPP). I've got quite a bit of networking to be able to take a few years off.

Back in 1999 I did leave my company for a short while, and when I returned I was able to just restart depositing into the same 401k account.

Just pondering my options and long term strategy going forward.

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whyohwhyoh
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Have you considered keeping the door open officially by taking a leave of absence?

Fuskie
Who notes this is no guarantee but it might make it more possible you can get your job back...
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Have you considered keeping the door open officially by taking a leave of absence?

Yes, this is an option. And probably the most likely option. I'd want 4-5 months minimum, and depending on the state of the organization, I might get it.

I need to be ready to walk though, this will give me better bargaining power, hence I'd like to understand all my options.

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whyohwhyoh
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(Not much in Roths, as we haven't been eligible for many years).

If you don't have any pre-tax IRAs, and/or you don't mind converting those pre-tax IRAs that you have to Roth accounts, you could have been doing 'back-door' Roth contributions for a few years now, where you contribute to an after-tax traditional IRA and convert immediately.

Back in 1999 I did leave my company for a short while, and when I returned I was able to just restart depositing into the same 401k account.

How long was 'a short while' compared to the 5+ years you anticipate taking off this time? Have your company's employment rules and/or 401(k) rules changed in the ensuing 14 years? Will the rules change in the next 6 years before you take off? Or the following 5+ years before you return?

Making the assumption that your experience upon your return in 1999 will be the same as what you would experience upon your return sometime in 2024 (or later) could throw a wrench in your plans, if the assumption is incorrect.

AJ
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you could have been doing 'back-door' Roth contributions for a few years now

Wow, I misunderstood what this was (I thought it was only for existing traditional IRA accounts).

So I have no traditional IRA accounts (but I do have a small rollover IRA from an old small 401k), so basically I deposit $11,000 (for married couples 2013) into a traditional IRA then immediately convert to a Roth IRA? Seems too easy. Does this work exactly like a RothIRA, where I can pull out the principle at any time penalty free?

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whyohwhyoh
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Does this work exactly like a RothIRA, where I can pull out the principle at any time penalty free?


The 5 year rule applies to conversions, so you can't take that contribution out until 5 years later.

More here: http://www.fivecentnickel.com/2012/01/16/roth-ira-withdrawal...
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So I have no traditional IRA accounts (but I do have a small rollover IRA from an old small 401k),

This counts as a 'traditional pre-tax' IRA, too.

You can solve for this few different ways:

- fully convert this account, too (and pay the associated taxes)
- roll this account to your current 401(k), if you are allowed to do so
- use form 8606 to pro-rate your conversions, and pay taxes on just the portion that is 'pre-tax'

If you are really solid on your plan to take a few years off, and therefore, are likely to have several years with lower earnings, you may also just want to contribute to a post-tax IRA now, and wait to convert both the small rollover IRA and the post tax IRAs at the same time, when you aren't working. If you convert when you have a lower income, you can take advantage of lower tax rates (assuming you don't think tax rates will go up significantly between now and then). You will end up paying taxes on any gains on the post tax contributions, in addition to the pre-tax rollover IRA. However, if you can keep your income (including the taxable amount of the conversion) below your current marginal tax bracket, you might end up paying less in taxes. You will need to file form 8606 each year you make after-tax contributions to an IRA.

basically I deposit $11,000 (for married couples 2013) into a traditional IRA

Kind of. The "I" in IRA stands for "Individual". So, it would actually be depositing $5,500 each to 2 individual accounts - one for you and one for your wife.

then immediately convert to a Roth IRA?

Yes, if you have either converted the rollover IRA to a Roth, or moved it to your current 401(k). If not, then you will use Form 8606 to pro-rate taxes between the pre-tax and post-tax amount.

Does this work exactly like a RothIRA, where I can pull out the principle at any time penalty free?

Conversions to a Roth need to 'season' for 5 years before you can pull them out tax-free and penalty-free. See IRS Pub 590.

AJ
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Very useful info. Thank you very much.

I went and took a look at that small rollover IRA which started at $12,000 in 2003 is now $36,500, so gains would be decimated by a hefty fed+CA tax rate.

Maybe this is why my brain locked out the backdoor Roth option.

I'm going to look into the option to roll this into my 401k account. I have a very good 401k account since 1997 at my current company. Same account number, low cost stock trading, and mutual funds etc.

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whyohwhyoh
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Have you looked at substantially equal withdrawl option from an IRA?
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Checked with my 401k and they do accept rolling money from external IRAs etc into my 401k plan. I don't see much of a downside, except I believe the trading commission is a little higher for stocks, I think $15 instead of $10, but I trade very rarely, maybe once every couple years. Also will incur trading costs as it looks like I will need to rollover cash then if I want to repurchase the 2 stocks I will incur trading costs again. Small change, but annoying nonetheless.

This will then let me start Roth contributions again through this backdoor scheme.

On the original topic....

SEPP is an option, but I would prefer the flexibility of getting the 55 year old rule. This is all just a hypothetical situation, not sure where I'll be financially in the next 5 or so years, just trying to learn about all my options... wound up learning a bunch about how to make this backdoor Roth scheme work...

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whyohwhyoh
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I don't see much of a downside

The downside of moving funds from an IRA to a 401k is that you are stuck with the investment choices and rules of the 401k with few options.

With an IRA, you are completely in charge and can move your funds to any other custodian at any time almost at will.
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The downside of moving funds from an IRA to a 401k is that you are stuck with the investment choices and rules of the 401k with few options.

In my 401k (troweprice) I can trade in stocks along with ETFs, although I don't believe I can trade in options or short sales or penny stocks. But I haven't really partaken in those much. So not much of a downside.

Upside is the backdoor Roth, and potential to access funds freely at around the age of 55.

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whyohwhyoh
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Upside is the backdoor Roth, and potential to access funds freely at around the age of 55.

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whyohwhyoh


Why does moving an IRA to a 401K give you back door access to a ROTH? An TIRA can be converted to a ROTH regardless of income.
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Why does moving an IRA to a 401K give you back door access to a ROTH? An TIRA can be converted to a ROTH regardless of income.

The OP had said earlier in the thread that he didn't want to have to pay CA & Federal taxes on the TIRA, which was now worth $36,500 - between CA and Federal, my guess is that it would be at least $10k in taxes, if not more. Especially if the OP is considering taking several years off in the future, it would make more sense for him to convert pre-tax accounts at that point, when his income is lower.

Since the after-tax income that the OP will be contributing to a Roth and then converting has already been taxed, and would be taxed whether or not he contributes it to an IRA, the back-door Roth conversion will let him save on future taxes.

AJ
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Since the after-tax income that the OP will be contributing to a Roth and then converting has already been taxed, and would be taxed whether or not he contributes it to an IRA, the back-door Roth conversion will let him save on future taxes.

AJ


Than you for the explanation. Moving the IRA to a 401K allows converting of new contributions to a ROTH without additional taxes.
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AJ,

Thanks for all the help. One more question and hopefully good discussion/info for this board... since the old 401k rollover IRA is in my name... can I go ahead and do a backdoor Roth in my wife's name? My CPA friend said this should be OK.

I called up TRowe today to discuss what exactly was needed to rollover my old rollover IRA and the guy was perplexed by this whole backdoor concept. He was actually reading some IRS pub aloud over the phone, and we ended the conversation with him unconvinced this was necessary, although he gave me some info on what I needed to do the transaction. I quickly contacted my CPA friend just to make sure I was doing the right thing.

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whyohwhyoh
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One more question and hopefully good discussion/info for this board... since the old 401k rollover IRA is in my name... can I go ahead and do a backdoor Roth in my wife's name?

Yes, as long as your wife doesn't have any rollover or other traditional IRAs in her name, you can do a backdoor Roth for her immediately. The IRS looks at IRA accounts for each individual, even if they are married filing jointly.

My CPA friend said this should be OK.

Glad I agree with the CPA!

I called up TRowe today to discuss what exactly was needed to rollover my old rollover IRA and the guy was perplexed by this whole backdoor concept. He was actually reading some IRS pub aloud over the phone, and we ended the conversation with him unconvinced this was necessary, although he gave me some info on what I needed to do the transaction.

I'm surprised he did that - every CSR at a brokerage or mutual fund company that I've ever asked a tax related question to has made it very clear that they are not someone who is qualified to give tax advice, and have shied away from even discussing these topics. So the fact that he started reading out of an IRS pub (obviously talking about taxes) is very surprising to me.

I quickly contacted my CPA friend just to make sure I was doing the right thing.

Well, it's the right thing to do if you don't want to have to partially/fully convert the rollover IRA, but still want to be able have a way to make Roth contributions. Hope your CPA friend agreed.

AJ
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It was strange that he actually started quoting from an IRS pub. All I called about was what was needed from TRP to properly make this transaction into my 401k.

And yes, my old college roommate CPA immediately agreed with the plan. Now why he never mentioned this scheme to me in the past few years I'll have to grill him on next time were out drinking.

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whyohwhyoh
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