Rule of 55 and Roth conversion of the balance | Ed Slott and Company, LLC

Rule of 55 and Roth conversion of the balance

Client is retiring and needs income until 60, currently is 55. Initially was looking at taking a partial of 2/3 the balance and rolling to IRA leaving the 1/3 to take out over 5 years from the plan. Now the question is, if he elects a 5 year payout of the DefBenPlan, in a 401K, can he keep the income he needs and convert the other 2/3 of the annual income to a ROTH IRA?

A 401k is not a DB plan, it is a DC (Defined Contribution) plan. The preferred situation here is when the 401k plan offers flexible annual distributions since you can then distribute just the amount you need each year penalty free. If you are sure of your needs for the next 5 years, you could do a direct rollover of the portion you expect not to need within 5 years to your IRA. If the plan then requires you to commit to a 5 year payout of the rest, you could roll over the portion you do not need each year to either a TIRA or a Roth IRA since the term of these distributions does not exceed 10 years and therefore they are rollover eligible. Probably not as beneficial as a flexible option because you must do several IRA rollovers and deal with mandatory 20% withholding on the entire distribution done each year, and that could mean uses your other funds to replace the withheld amount in order to complete the rollovers you wish.

Thanks, and yes, i was typing quickly and mispoke, its a DC plan of course.


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