72t Early withdrawl strategy for career transition

Need some input from the retirement crew! I am 55 IRIF'd exec with a 30 year lump sum Corporate payout plus IRA ( I just made the cut) , but I have young children so I need to get a new career. I decided to forget the corporate world and to work on my own /// so I will need some cash flow for 3-5 years as I transition. Went to CFP and he wants to do variable annuity for 6 years plus some other income from REIT's. We are using the fixed payment withdrawl option a 72t as the vehicle. It will give me the short term income taxed at normal rates I need inside an annuity chassis but the fees and commissions on a VA are pretty steep. Does anybody have any suggestions that could preserve capital and give me an interim income strategy for a restart.

I have 2 words for your interim "work". Real Estate!
This assumes you have the stomach for it.

John Galt

[DFW_M5]

Hi Ron, I am in a similar situation as you. Took a buyout package at 54 end of last year, and needed to get another job to get me to 59.5. I also have a son heading off to college this year and a 13 year old at home.

I have been lucky to have found another job quickly, although I'm not too thrilled with it and may look for something else. My suggestion would be to create a fixed income biased portfolio that is sized to give you what you need income wise using 72T, and then try to balance the remainder, so that overall you have an appropriate allocation of asset classes. For the 72T portfolio, I would consider adding some reits/preferred stocks to boost the yield (7-8%), some collateralized mortgage obligations (6%), high quality corporate notes/CD laddar (2.5-4+%), and may be some type of equity trust and/or some TIPS.

I also got pitches for variable annunities, but the costs are high and I believe you can do better through other investment mechanisms, however, at some point down the road, if interest rates go high enough, I may look at converting a portion of my portfolio (~20%) to an immediate annuity. Good luck!

Doug

One more comment about semiretirement, and/or
a job bridge to get to ER. From 1987 to semiretirement
in 1993, I ran my own show (2 different businesses).
Completely independent. I knew I would need to work
a while after 1993 and assumed that I could go back to work for someone else as it was just part time to produce some cash flow, not to be a career. Well,
I found a job quickly doing accounting and tax work for a
local CPA. The guy was pretty easy to work for but
I hated it. After 6 years totally on my own, having a
boss again was intolerable. I toughed it out through one tax season until a consulting job fell in my lap.
That lasted 4 years. I still had a boss but it was easy work and the money was good. By 1998 I could see that I could make it without steady employment and made the final leap into ER. If I had not gotten lucky with the
consulting gig, I would have concentrated on real estate. I already had a bunch of property to use as a
base. IT worked out okay though and I still own enough real estate to "dabble".

John Galt

[charlie]

Ron,

I used the 72t approach under a similar situation
when I retired in '89 at age 55. The withdrawal
rate will likely be higher than the 4% many consider
"safe". It is possible to control the total withdrawal
by splitting your IRA into 2 parts and only withdrawing
from one. Your CFA can advise you on this. You
could also convert part of your IRA to an immediate
annuity that guarantees payment for 5 years. I
don't think this would trigger the 10% tax penalty but
double check. Here is a website that is useful for
exploring the immediate annuity idea:

www.immediateannuities.com

Cheers,

Charlie

[wzd]

For my 72t portion I set up a corp bond ladder. The penalties at the time for busted SEPP's were severe, so I took a relatively safe course. The non-72t portion of my IRA (I split into two accounts) was asset allotated in stock funds (some ETF, some low cost index funds).

Some after tax funds were left in indiv. stocks, but I expect to change that soon. Somehow I have less interest in following individual stocks than I used to have.

Rental real estate is my alternate job, but I have ended up hiring most of that work out. I still make money, but also have been spending less and enjoying not working. In almost any given month, I can always go paint one of my units instead of hiring it out and save $250. But usually I would rather not; If need be I have the option.

Wayne

[mickeyd]

[Went to CFP and he wants to do variable annuity for 6 years quote][/quote]

A VA is not usually appropriate for a mere 6 year period. The planner may be looking to make money at your expense.

Regarding 72t,
Is there any difference between a "traditional IRA" and a "rollover IRA"? Does the IRS treat them differently for the plenalty free withdrawals?

I am CONFUSED

[BigMoneyJim]

Regarding 72t,
Is there any difference between a "traditional IRA" and a "rollover IRA"? Does the IRS treat them differently for the plenalty free withdrawals?

I am CONFUSED

I don't believe there is any difference in 72(t) withdrawals.

I am not even sure if "rollover IRA" is an IRS term or just a term the investment companies use.

If I recall correctly, there is an issue with comingling certain contributions (nondeductible?) that would prevent you from rolling an IRA back into a qualified retirement plan (401(k), 403(b), 457, etc.). But if you roll into a "rollover" IRA and don't mix the funds with other contributions I believe you can later roll that IRA into a new employer's 401(k) or similar plan. (I'm not sure why anyone would want to, though; perhaps if you retire between 55 and 59 1/2 it has advantages.)

It's been 3 or 4 years since I read into all this, so I may have my facts mixed up.

. . .

I'm using this Google search to check a couple of things. Page 25 of IRS pub 590 describes using an IRA as a conduit of assets from one retirement plan to another and calls it a "conduit IRA", and no contributions may be mixed with the plan assets if it is to remain eligible for rolling into another retirement plan.

1992's Form 5498 had a box for "Rollover IRA Contributions", but I don't see the term anywhere else in the IRS site.

So my hastily-researched conclusion is that "rollover IRA" is an investment company's term for a conduit IRA which is nothing other than an IRA with assets rolled over from a qualified retirement plan, and as long as you don't mix that money with other assets you are eligible to roll it into another qualified plan (401(k), etc).

I don't see that it has any bearing on 72(t) withdrawals if you leave it as an IRA. I hope not, as this is my early retierement plan. I researched this 3 or 4 years ago and convinced myself that I could...I just don't remember all the details at the moment.

Thanks,
I am referring specifically to penalty free withdrawals, prior to being 59 1/2.

Another person wrote:
The exceptions you quoted did not include one critical section. Look at 72(t)(3)(A) which in effect says .... the early retirement exceptions to the penalty does n o t apply in the case of a Traditional IRA

And this is why I am CONFUSED

[BigMoneyJim]

Thanks,
I am referring specifically to penalty free withdrawals, prior to being 59 1/2.

Another person wrote:
The exceptions you quoted did not include one critical section. Look at 72(t)(3)(A) which in effect says .... the early retirement exceptions to the penalty does n o t apply in the case of a Traditional IRA

And this is why I am CONFUSED

Where was that said? That doesn't sound right. Check here and the question above it. It appears to me 72(t)(3)(A)(iv) is the part that excludes the 10% penalty for SEPP's.

I can't find mention of 72(t)(3)(A) without the (iv). But laws and tax codes are very confusing to read; I had some experience with 49 CFR when I was a dangerous goods shipping specialist...reading the actual codes straight from the book it appeared everything contradicted itself. I have confidence in the linked IRS FAQ.

intercst's 72(t) article might be of use, too.

Gosh this is hard.....Maybe I'll just keep working instead.
Can someone tell me why this exception exists? The 72t rule is very obscure, in my opinion and I am concerned that this "loophole" will be closed before I get a chance to take advantage of it.

[JWR1945]

For jazz:

The loophole won't be closed. There are all sorts of special cases such as people with terminal illnesses.

For most people, the withdrawal amounts from using the SEPP loophole is not that high until they get very close to 59.5.

But this is the real reason that it won't close: you pay taxes immediately when you make withdrawals. Congress always likes the idea of tax revenues now as opposed to later.

BTW, wondering about why we have sheltered retirement accounts in the first place? Think about all of those rumors about the solvency of Social Security. [Not having to pay 100% of the planned benefits to well-to-do retirees could mollify the political effects of future Social Security cuts.]

Have fun.

John R.

[Ed_B]

But if you roll into a "rollover" IRA and don't mix the funds with other contributions I believe you can later roll that IRA into a new employer's 401(k) or similar plan. (I'm not sure why anyone would want to, though; perhaps if you retire between 55 and 59 1/2 it has advantages.)

BigMoneyJim:

In most cases, people won't want to roll an IRA into a 401k plan since there is much more flexibility in what you can invest the money in with an IRA.

There are two reasons that I know of for doing it though. First, the laws in some states differ on the level of protection from creditors that is given to 401k plan money vs. that of IRA money. In WA, where I live, the two are regarded equally and there is no advantage for a 401k in this regard. From what I have read, however, this is not true in all states so it would be good to check this before doing a rollover if a person was concerned about this. Second, as you mention, it is often possible to take penalty free distributions from a 401k if one retires between the year that they become 55 years old and age 59.5. I am planning to do this myself in lieu of a SEPP due to the distribution flexibility. I can take only what I need and do not have to set up a fixed payment schedule which may provide more or less than needed. I will need to leave my 401k money in the company plan for this to work but the funds are decent and I only need to do this for 5 years. Once I reach age 59.5, I can roll the money into an IRA for maximum investment flexibility and take any distributions needed without penalty.

Regards,


Ed_B

[Michael]

BTW, wondering about why we have sheltered retirement accounts in the first place?

I read the book by Ted Benna, the man who figured out how to use section 401k of the tax code to help the common people. Apparently, Congress never intended for most people to have this tax deduction. They intended to write a small excemption for a special interest group, the banking industry, but they worded it wrong. Ted was able to figure out how to design a plan to help many others, and by the time Congress got around to trying to modify the law, it was too late. So many people had a 401k plan that they were able to successfully pressure Congress not to take it away from them.

Later on he partnered up with the Japanese and opened
a restaurant; Bennahana.............

John Galt