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Penalty Free Withdrawals at age 55?
Old 05-08-2012, 10:34 AM   #1
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Penalty Free Withdrawals at age 55?

I plan to retire in the next couple of months, and as I understand it, I'm required to roll my lump sum pension of about $450K into an IRA and can only take 72-T distributions if I want to avoid the 10% early withdrawal penalty.

I also have a company sponsored profit sharing plan worth about $530K that is currently with Vanguard. Since this is a 401K, will I be able to take penalty free withdrawls from this amount?

I receive a VA pension of $43,000/Yr (tax free), and will also start receiving retired reserve (Army) pay at age 60, plus SS at age 62.

Am I ready?
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Old 05-08-2012, 10:38 AM   #2
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If you retire from a company in the year that you will turn 55 then you can indeed make penalty free withdrwals from the company 401k.

Perhaps you could roll the pension lump sum into the company 401K and then take penalty free withdrawals from the total.

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Are you ready ?
1) Moneywise, do the various pensions plus sustainable withdrawals meet or exceed your expenses ?

2) Retirement Attitude-wise - Only you can answer that one.
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Old 05-08-2012, 10:39 AM   #3
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You're probably not "required" to roll your lump sum pension into an IRA, but it would be the wise thing to do since you don't want to pay taxes and penalties on the lump sum.

While many 401k plans allow penalty-free withdrawals if your leave service after age 55, not all do, so you should check with your employer and plan administrator.
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Old 05-08-2012, 10:47 AM   #4
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Can I do that without paying taxes on the lump sum?
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Old 05-08-2012, 10:57 AM   #5
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Not sure what you mean by "that".

If you roll the lump sum from the pension into an IRA (directly from the pension plan to the IRA administrator) then you would not owe penalties or taxes since you have not received distribution. If you later take money from the IRA, any withdrawals would be part of your taxable income in the year withdrawn and would be subject to early withdrawal penalties if you are less than 59 1/2.
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Old 05-08-2012, 10:57 AM   #6
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If you "roll" the lump sum into an IRA or 401k then there will be no immediate income taxes.

When you take withdrawals then income taxes will be due on whatever you take out.

This all assumes that the pension was funded by your company and is "untaxed" money. If you paid contributions into the pension with "after tax" dollars then a portion of the pension will not be taxed.
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Old 05-08-2012, 11:13 AM   #7
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OK, so as an example I roll everything into the Vanguard 401K and have a total of $960K. If I take a monthly withdrawal of $4000, what would my net be after taxes?
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Old 05-08-2012, 11:51 AM   #8
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if you are single with an income of $4k/month = $48k/yr, your federal taxes will be $5593/yr leaving you with $42407/year or $3534/month.

You'll need to figure out your state tax and subtract that out. You can ballpark state taxes at (perhaps) 25% to 35% of your federal tax.

Here's a link to a federal tax calculator:

http://www.dinkytown.net/java/Tax1040.html
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Old 05-08-2012, 11:55 AM   #9
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Thanks, but I'm married with 4 kids at home. Can I get another estimate?
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Old 05-08-2012, 12:00 PM   #10
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Can I get another estimate?
You sure can. Just go to the (tax calculator) link I provided.
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Old 05-08-2012, 12:13 PM   #11
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Looks like I'm in the 10% bracket, but won't be paying any taxes while the kids are still in school, can this be correct?
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Old 05-08-2012, 12:34 PM   #12
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Not sure what numbers you are putting into that calculator but it looks like taxes of 13 hundred and something to me.
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Old 05-08-2012, 12:39 PM   #13
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As I mentioned before, I have a wife and four (4) school aged kids. Can anyone confirm what my Fed taxes would be on a 48K annual income?
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Old 05-08-2012, 12:45 PM   #14
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Originally Posted by rdjrn View Post
As I mentioned before, I have a wife and four (4) school aged kids. Can anyone confirm what my Fed taxes would be on a 48K annual income?
I hate doing my taxes, no way am I going to do yours!

This site will provide a good estimate of what your taxes should be: 1040 Tax Calculator
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Old 05-08-2012, 12:54 PM   #15
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Thanks REWahoo! After running my numbers again using your link, It still appears to me that I won't be paying in any Fed income tax until my kids are through with college (all 4 qualify for the Child Tax Credit).
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Old 05-08-2012, 01:48 PM   #16
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I know nothing about the Child Tax Credit but it does look like if your 4 kids qualify for it you will have no taxes due on an income of 48K. At least that is the case if that tax calculator is right. Have a look at the irs.gov website and download the 1040 and instructions and the form for the Child Tax Credit and run your numbers through them just to make sure.
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Old 05-08-2012, 02:56 PM   #17
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For something this important, I think I would want to be able to do my own taxes with tax software and not rely on relatively anonymous internet posters.
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Old 05-08-2012, 03:38 PM   #18
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Child tax credit ends the year each child turns 17. And it may change depending if Congress renews that credit sometime this year.

When your children are in college, you MAY be eligible for one of the educational tax credits. Again, it'll depend on what Congress passes this year.

If your retirement is so dependent on if you must pay federal income taxes, your not ready.
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Old 05-08-2012, 03:43 PM   #19
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RE2Boys: No,....not at all dependent on this, haven't even given it any thought until today, but if true would be a nice little cushion.
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