Alternative to 72t for 55 year old ER?

[RatherBeFishn]

Is there any alternative to using 72t (SEPP) if you are 55 years old and retired to get $$ out of 401K without paying 10% penalty?

[ats5g]

Check with your HR dept. and read your Summary Plan Document. I believe that some 401(k)'s will allow you to start withdrawals at 55 [my old 401(k) did]. So, you may not want to roll all of the funds into an IRA. If you want to roll over to an IRA, but are concerned about the SEPP, you might explore a partial rollover and then withdraw funds from 401(k) until 59 1/2, then roll the rest over.

- Alec

[BigMoneyJim]

Quote:

Is there any alternative to using 72t (SEPP) if you are 55 years old and retired to get $$ out of 401K without paying 10% penalty?

I *think* that they have to let you withdraw your 401(k) at 55 if you've quit. Corporate info will probably emphasize annuity payouts to the point of hiding the option to make withdrawals. Check IRS guidelines if your HR or benefits department tells you otherwise.

. . . Decided to do a quick search myself and was surprised to see the IRS says you can't take withdrawals from a 401(k) before 59 1/2 without penaly, but found an exception for separation of service (quitting?) at or after age 55 for qualified retirement plans (includes 401(k)): http://www.irs.gov/publications/p575/ar02.html#d0e3742 (scroll down to "Additional exceptions for qualified retirement plans" a few paragraphs down)

EDIT: Does this mean that if I retire before age 55 I can't withdraw penalty-free from my 401(k) at 55?

If you leave in the year in which you turn age 55, you may withdraw money from a qualified defined contribution plan without being subject to the 10% penalty tax. It doesn't matter why you leave, you just need to turn 55 in the year you separate. Even if you are 54, but will turn 55 later in the year you do not have to pay the penalty tax on withdrawals prior to age 59 1/2.

[Adventuregirl]

Hi all!
I've been curious about this subject myself. I've been socking money away in my 401K, and am afraid that I won't be able to touch that money and retire early as I'd like to.
I was wondering if I should be putting a portion of the money that going into my 401K into some other investing vehicle that can be withdrawn at say, 50, when I'd like to be ER... :-/
Please let me know if I'm on the right track to ER...
Thanks!
Adventuregirl

Hello Adventuregirl. Others can offer better
technical advice, but here is my story.

Semiretired (working part time) in 1993 at age 49
almost literally on a shoestring. Figured I would have
to draw on my IRA starting at once, using the various
non-penalized early withdrawal methods. Well, time
passed and I got lucky with my work and some
investments and here I am, 60 years old and have not touched the IRA yet. I stopped work completely in 1998.
This is not a road map as so much luck was involved.
Sometimes it really is better to be lucky than good.

JOhn Galt

[RatherBeFishn]

Good input. I did check with my 401k company (Fidelity) and learned this. They offer Systematic Withdrawals from their 401K's. They must start after you leave the company in the year you turn 55, and once begun cannot be stopped while you still have the 401k. You could do systematic withdrawals until you are 59 1/2 and then rollover to an IRA though. Amounts and frequency are flexible (monthly, qtrly, yearly, etc). All distributions are taxable as current income. This seems more flexible to me than doing a SEPP (72t).

Do any of you have any experience with systematic withdrawals and have any other gotchas, pros or cons to add?

She also talked about using Net Unrealized Apprciation for the company stock in my plan. Using this method you must withdraw the total company stock within 1 year of starting. You pay ordinary income tax on the cost basis of the stock, and 15% cap gain on the difference between the market value and cost basis. My company stock has appreciated a lot and there is a big difference there. The down side is you have to withdraw it all and pay the tax within1 year.

Do any of you have any experience with this and anything to add on pros, cons, gotchas etc?

[KB]

Couldn't you just roll the company stock money into another fund? Then treat all the 401K with the same with the same w/d formula?

[RatherBeFishn]

Yes, you could. But if you do that you lose the option to have the gain taxed as a gain at 15%, rather than current income. With the amount of company stock it's a fairly significant difference. If I 'sell' the stock within the 401K and then reinvest into other stock or bond funds, when the $$ is withdrawn it's taxed as ordinary income.

[Nords]

... is diversification.

This allows you to dump a whole bunch of company stock without overly penalizing yourself or having to deal with rollovers & 72(t)s. You get to realize the value of all that deferred income without being handcuffed to your former company's wellbeing (or their executive's integrity)!

Considering what people have learned about their company stocks over the last few years, I'd take the NUA and run. Unless, of course, you're working for Warren Buffett...