Penalty Free Early 401K/IRA Withdrawals

[NanoSour]

Gotta put this to the community for a sanity check. I'm planning to use my current 401K assets to supplement my retirement starting at age 50 and using it all by the time I take SS. I know you can do a 72t, but I believe that would smooth it out over your lifetime and not till age 62 if that is when you want to start taking SS.

So the plan would be to roll the 401K over to a traditional IRA and then convert the amount you want to take annually over to a Roth. I'll pay tax on the converted amount which I will keep below the 15% tax bracket. From there I can just immediately withdraw the money which is all basis.

My understanding is that the 10% penalty only applies to gains. Is this correct? Please shoot holes in this if there are any.

[Animorph]

Roth conversions have a 5 year waiting period that is further complicated by age 59.5 limitations as well. Your plan will not work.

The 72t rules do not require withdrawals for your lifetime. I believe it is something like 5 years or 59.5 (whichever is longer), but I haven't looked at it carefully. Someone here should know. This is probably what you should be looking at.

[Dimsumkid]

If using rule 72t, you don't pay the 10% penalty on anything.

[Brett_Cameron]

My situation was a bit different. Retired at 55. Started systematic withdrawals straight from the 401k designed to deplete the 401k by age 70. I am not sure your employer will allow you to do that. Check your 401k summary plan description and see if that can be done without rollover to IRA. Probably not. As for systematic withdrawals from and IRA, IIRC there are exactly two methods to determine withdrawal amounts prior to age 59 1/2. Both of these methods are locked in and can't be changed for some years, I do not remember how long (maybe 5 years and be older than 59 1/2?) Neither fit my desire so I used the 401k withdrawal option.

I plan to roll to IRA and change the withdrawal strategy when I am 61, btw.

[Animorph]

Here's some real 72t info:

The 72t Early Distribution From Your IRA - Forbes

"
In case you don’t know what a 72t distribution is, this is shorthand for the Internal Revenue Code (IRC) Section 72 part t. The most popular provision of this code section, (actually IRC Section 72(t)(2)(A)(iv)), is known as a Series of Substantially Equal Periodic Payments – SOSEPP for short.
But enough about the code section already. What is this thing? A SOSEPP is a method by which you can access your IRA funds prior to age 59.5. In order to take advantage of this rule, you determine the amount of the annual distribution from your IRA (this is done in a specifically prescribed manner, more on this in a bit) and then begin taking the distributions. Once you start the SOSEPP, you have to keep it going for the longer of five years or until you reach age 59.5."

[zinger1457]

Since interest rates today are so low the maximum amount that you can pull from your IRA/401K using the 72t option is relatively low. The interest rate that you can use to calculate a 72t distribution can be no more than 120% of the current federal mid-term rate which means right now the maximum is about 1.3%. Google '72t calculator' to get an estimate of what you'll be able to get from your savings. For a 50 year old with $500K the maximum 72t distribution is about $18K/year. And as others mentioned once you start the 72t the earliest you could stop it is at 59.5 years old.

[NanoSour]

Thanks. Great information even if it does make things a little more complicated than I'd like or than they have to be.

[martyb]

Is the fact that NanoSour wants to convert the money from a 401k to a tira & then into a Roth IRA the reason they can't withdraw funds without a penalty? I have a Roth IRA, and I believe I can withdraw money right now, penalty free, even though I am only 55. All my contributions are available to me at any time, tax & penalty free. Is why is OP's situation different from mine? I'm not talking about 72t.

[RunningBum]

Distributions After a Roth IRA Conversion explains the 5 year rule under age 59.5 well.

[martyb]

Thanks for the link. Makes sense to me. None of my Roth IRA is conversion money, so not applicable to me.