Planning on a 72t

[Gazingus]

I'm interested in how many here actually have done a 72t and what advice they have for me. I will retire in 2017 at age 55 1/2 with a non-cola'd pension of $3700/month plus decent retiree medical benefits. We want to use about $6k/month pretax in retirement so I plan to augment that with SEPP on a rollover account that will withdraw about $30k/yr for five years. We have $1.2 MM in taxable accounts, 100% equities. No mortgage, no kids, no debt. We live in a barndominium and pay low taxes and utilities.

I'm not too worried about reducing principle. If worse comes to worse, I can envision us having to sell our property (72 acres worth $600k today) at some ripe old age.

I think I understand most aspects of 72t, but I've never read a good explanation of how many ways you can "bust" one. I don't think it applies to me because I only plan to withdraw $150k from a $650k account.

Any observations on this plan would be appreciated.

 

[Brett_Cameron]

If your money is in an IRA then 72t is applicable. There are two-three ways to determine the amount and you must continue the 72t withdrawals until 5 years and your age 59 1/2.

If you change the withdrawals from the selected withdrawal determination method you would owe a penalty of 10% of the total amount withdrawn.

If your money is in a 401k from your employer at the time of your retirement, different rules apply.

See IRS Publication 590. http://www.irs.gov/pub/irs-pdf/p590.pdf pages 55-56 for details and exceptions.

 

[frayne]

Do your homework and keep excellent records is my best advice and be prepared to provide documentation to the IRS if questioned about your respective 72T. Also familiarize yourself with IRS form 5329 in order to note your exception to the 10% penalty. I did the 72T and also was called on it by the IRS and provided the documentation to satisfy them. Actually it wasn't a big deal to me but DW was worried.

The funny thing is I started the 72T about seven years ago and am basically taking the same withdrawal amounts as when I started.

 

[Gazingus]

Luckily, I had been rolling all eligible money from employer's plan to rollover IRA for many years. I had no idea that I was making ER possible because employer would probably not provide for 72t paperwork.

The withdrawal rates for current balance in that account is perfect right now.

 

[clifp]

I think I understand most aspects of 72t, but I've never read a good explanation of how many ways you can "bust" one. I don't think it applies to me because I only plan to withdraw $150k from a $650k account.

Any observations on this plan would be appreciated.

By far the best resource on the web is 72t.net.
I think you are right if you are only tapping 150k out of 650K you are fine.
But in general if you attempt to draw as much as possible (because lets say you have a pension that kicks in at 60 or 62) and the market takes a nose dive you may not have enough money to support the withdrawal. IIRC you are allowed one reset of the amount, which was a changed that occurred in the last decade or so.

 

[zinger1457]

I think you are right if you are only tapping 150k out of 650K you are fine.
But in general if you attempt to draw as much as possible (because lets say you have a pension that kicks in at 60 or 62) and the market takes a nose dive you may not have enough money to support the withdrawal. IIRC you are allowed one reset of the amount, which was a changed that occurred in the last decade or so.

With a 72t the interest rate that you use to calculate the maximum distribution is limited to 120% of the Federal Mid-Term rate which this month is 1.46%, it should go up a little in the coming months. If the 72t plan was started this month the maximum you could withdraw from a $650K account is about $27K/year. Assuming the 72t plan is shutdown after the minimum 5 years the maximum that could be withdrawn under your 72t plan over that period would be about $135K.

 

[Buckeye]

Luckily, I had been rolling all eligible money from employer's plan to rollover IRA for many years. I had no idea that I was making ER possible because employer would probably not provide for 72t paperwork.

The withdrawal rates for current balance in that account is perfect right now.

IIRC, if you retire from a company at age 55 or later, you can withdraw from your 401k with no penalty or special paperwork. You may want to leave the money in your 401k for the next few years and you won't have to bother with a 72t to access it.

How were you able to roll 401k monies to an IRA without retiring or leaving the company? Based on other posts, that sounds very unusual.

 

[arky]

IIRC, if you retire from a company at age 55 or later, you can withdraw from your 401k with no penalty or special paperwork. You may want to leave the money in your 401k for the next few years and you won't have to bother with a 72t to access it.

Some 401k plans allow this, some don't. Check with the custodian. If it is allowed, there are usually very few restrictions on the timing/amount of the withdrawals all the way to age 70.5.

 

[Buckeye]

Some 401k plans allow this, some don't. Check with the custodian. If it is allowed, there are usually very few restrictions on the timing/amount of the withdrawals all the way to age 70.5.

I'm still amazed by the OP's ability to move money from 401k to IRA without separating in one way or another from the company.

 

[almost there]

72(t) Calculator - Dinkytown.net Financial Calculators

The new rate is 1.9%, not the listed 1.46%

For me, its just a way to move money out at 52 yrs. old for other investments.
Or might even use a little! The horror,,,,,,,,,,,

And yes, I had to leave the Co. to roll it over.

 

[NW-Bound]

I'm still amazed by the OP's ability to move money from 401k to IRA without separating in one way or another from the company.

I was once at a megacorp that allowed rolling out the company matching portion to an IRA. There was no age limit. If I remember correctly, your own contribution is only rollable in case of termination.

However, there was a penalty. They would stop the matching for 6 months.

It appears every 401k is different.

 

[Gazingus]

I was allowed, wtihout penalty, to roll out employer match and I believe after-tax dollars that I contributed early on.

We are consistently told that withdrawals before age 59 1/2 will be subject to penalty. Is the no-penalty for age 55 with retirement an IRS rule or vary by employer?

 

[Cooked]

I was allowed, wtihout penalty, to roll out employer match and I believe after-tax dollars that I contributed early on.

We are consistently told that withdrawals before age 59 1/2 will be subject to penalty. Is the no-penalty for age 55 with retirement an IRS rule or vary by employer?

The IRS allows penalty free withdrawals from 401k if you retire from that company during/after 55.

But your 401k plan may not allow withdrawals in this period.

 

[RAE]

The IRS allows penalty free withdrawals from 401k if you retire from that company during/after 55.

But your 401k plan may not allow withdrawals in this period.

Correct. I retired from the fed. govt. during the year that I turned 55 (I was actually 54 1/2 at retirement), and was able to start making withdrawals from my govt. Thrift Savings Plan (which is the fed. govt. version of a 401(k)) right away, with no penalty. I understand you can do the same thing with some private 401(k) plans, but you do need to check with your employer to make sure it's permitted in your case.

 

[teejayevans]

72(t) Calculator - Dinkytown.net Financial Calculators

The new rate is 1.9%, not the listed 1.46%
.

I don't know where you saw that, IRS pub for July was 1.46??

Do you have to recalculate it every year with the new rate?

TJ

 

[NW-Bound]

I was once at a megacorp that allowed rolling out the company matching portion to an IRA. There was no age limit. If I remember correctly, your own contribution is only rollable in case of termination.

However, there was a penalty. They would stop the matching for 6 months.

It appears every 401k is different.

I was allowed, wtihout penalty, to roll out employer match and I believe after-tax dollars that I contributed early on.

We are consistently told that withdrawals before age 59 1/2 will be subject to penalty. Is the no-penalty for age 55 with retirement an IRS rule or vary by employer?

I now remember why workers at that megacorp rolled out the employer match even if they had to take the 6-month penalty.

That was because the company match was always in company stock, and there was no way one could sell it to buy something else in his 401k to diversify. So, rolling out to an IRA was the only way to sell it to avoid too much concentration in one stock.

They later relaxed that rule (with IRS approval?) and allowed selling it inside 401k. I do not remember when that happened. But I remember clearly that after the 2000 meltdown, there were so many stories in the press about employees of companies like MCI/Worldcom losing their job and getting their 401k wiped out at the same time.

So, my wife's megacorp (one of the Dow 30s) started to discourage its employees from concentrating too much in company stock, meaning holding more than 20%. If you were already above that, they did not force you to sell, but stopped you from buying more. And if you sold, you could not buy back if you were still above 20% in company stock.

PS. I have told this story before about my BIL. He took a big gamble and put all of his 401k into his megacorp stock when it tanked in the early 90s. It then recovered. He was lucky and retired early 10 years later with $1.8M. Hah! He's also a guy who drives without seat belt on, because he believes the seat belt would give him a bad backlash.

 

[clifp]

I don't know where you saw that, IRS pub for July was 1.46??

Do you have to recalculate it every year with the new rate?

TJ

The home page of 72t.net list shows the 8/1/2013 120% max distribution rate of 1.45% but it jumps to 1.95% starting 9/1/2013.

 

[jazz4cash]

I'm still amazed by the OP's ability to move money from 401k to IRA without separating in one way or another from the company.

This provision is up to the employer. Larger plans and plans that are more employee-friendly are more likely to have this provision. The custodian would prefer to have the funds locked up so they keep the assets under thier control. My megacorp plan has the provision, but hardly anyone is aware of it because it's buried in the fine print of the Summary Plan Description. Any funds that are vested qualify for the rollover. When I call Fidelity to do this once or twice a year, they seem surprised too!

 

[teejayevans]

The home page of 72t.net list shows the 8/1/2013 120% max distribution rate of 1.45% but it jumps to 1.95% starting 9/1/2013.

If it was me, I would only take the number from official IRS document, and would print it out for my records, busting a 72t would be most painful. The phrase "trust but verify" applies.
TJ

 

[MRG]

I'm still amazed by the OP's ability to move money from 401k to IRA without separating in one way or another from the company.

I did it and know 50 others that did the same thing at Megacorp. In the old days(pre 2007) is was hush, hush and started after 55. In 2008 they started 'encouraging' old-timers to leave they changed it to age 50, put it in the company policies etc.....

MRG

 

[zinger1457]

72(t) Calculator - Dinkytown.net Financial Calculators

The new rate is 1.9%, not the listed 1.46%

The August rate is 1.95% but if you start your distributions in August then you need to select the interest rate from one of the two previous months (June or July), so the maximum you could use is 1.46%.

 

[Gazingus]

The August rate is 1.95% but if you start your distributions in August then you need to select the interest rate from one of the two previous months (June or July), so the maximum you could use is 1.46%.

Will my 72t rate be locked in for the five years of my SEPP?

 

[zinger1457]

Will my 72t rate be locked in for the five years of my SEPP?

The short answer is yes. If you look at a 72t calculator you will notice there are 3 distribution methods to choose from, required minimum, amortization, and annuitization. The minimum distribution method is determined by dividing your account balance by the value in the life expectancy table for your age. It is recalculated every year but it also has a much lower initial payment so if you are looking at getting the maximum distribution allowed it's usually not the best choice. Both the amoritization and annuitization methods interest rates are locked in but do allow a one time switch to the required minimum method. I believe the main reason the IRS allowed this switch was so one could avoid draining their account of funds if their investments took a dive.

As others suggested you need to be very careful when setting a 72t up. Don't take what I or anyone else says as gospel. Study up on the IRS 72t documents and as was recommended 72t.net is a good source.