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Should I 72T or not
Old 04-04-2007, 10:12 AM   #1
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Should I 72T or not

I'm looking for some opinions on whether a early retiree, after rolling over their 401K money, should draw income from this money under the 72T rules, or just pay the extra 10% tax, and only draw money when and if needed.
I realize that not using the 72T plan could cost me 4 to 5K a year in extra taxes but I wouldn't be locked in to a five year plan in the event I need to change my withdrawel rates in the event of a downturn in the economy.
Anyways, just looking for opinions on the best way to draw income from a rolled over 401K plan.
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Re: Should I 72T or not
Old 04-04-2007, 10:22 AM   #2
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Re: Should I 72T or not

i believe that if you have mutliple IRAs you could draw from one under 72T, and if needed at a later date, begin to withdraw from others. i sure wouldn't be voluntarily looking to pay the penalty!
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Re: Should I 72T or not
Old 04-04-2007, 11:17 AM   #3
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Re: Should I 72T or not

I am currently debating the 72T thing for this year or next year. I do not have a pension but a healthy IRA Rollover and 401K is still at Mega Corp. I may wind up with a 72T at the max they allow on the the Rollover and wait a whie longer on the 401K. If I take out more than needed I can save it. When the plan ends at 59.5 years (plus a few days) if I have a stash saved up, then I can live off of it and continue ROTH conversions.

For you it depends on how strong your cash flow is without the 401K and your age. It is not an all or nothing approach. As suggested by d, you could do more than 1-72T if need be. Or start it and bank it to build up a cash cushion.

So many choices and so few who understand our decision making processes!!!
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Re: Should I 72T or not
Old 04-04-2007, 11:19 AM   #4
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Re: Should I 72T or not

Does your company give you the option of leaving your assets in the 401K? I believe the rules on withdrawals from an IRA are different from withdrawing from a 401K. If you withdraw from a 401K after you terminate employment and you terminate after turning 55, you are exempt from the penalty. BUT, if you rollover the exact same funds into an IRA, the rules change and you ARE subject to the 10% penalty if you withdraw.

I went around in circles trying to develop 72T strategies until I realized that I had an out under this rule. A key part of this is the assumption that the administrator of your company's 401k is a reasonable and competitive organization. I lucked out... my company uses Vanguard so I don't have any incentive whatsoever to do a rollover to some other organization.




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Re: Should I 72T or not
Old 04-04-2007, 11:39 AM   #5
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Re: Should I 72T or not

Quote:
Originally Posted by testtubes
I'm looking for some opinions on whether a early retiree, after rolling over their 401K money, should draw income from this money under the 72T rules, or just pay the extra 10% tax, and only draw money when and if needed.
I realize that not using the 72T plan could cost me 4 to 5K a year in extra taxes but I wouldn't be locked in to a five year plan in the event I need to change my withdrawel rates in the event of a downturn in the economy.
Anyways, just looking for opinions on the best way to draw income from a rolled over 401K plan.
you don't state your age, but if you leave it in the 401k and you are 55 you can
withdraw without penalty.
Create multiple IRAs, can 72t one, then if you need more, 72t the second and
so on...
Tom
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Re: Should I 72T or not
Old 04-04-2007, 11:51 AM   #6
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Re: Should I 72T or not

I am 48 and recently retired, with 89% of my assets in IRAs.

I split my IRAs and am taking 72t payments from the 'big' IRA, while
leaving the other IRA for contingencies in the future if something goes
really wrong.
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Re: Should I 72T or not
Old 04-04-2007, 12:04 PM   #7
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Re: Should I 72T or not

You can also convert a piece of the IRA to a Roth IRA, and then 5 years later withdraw that converted amount as a "contribution" tax/penalty free... tax free because you already paid the taxes when you converted from the IRA to the RIRA.

The downside is you have to wait 5 years to access the money, and you have to pay taxes on it 5 years before you use it.

The upside is you can convert more/less/stop. This is my current plan when I ER to access my IRA funds.

A 72T seems to restrictive for young people (ER target 40 yo). Having to do 20 more years of forced withdraws and if you get it wrong being screwed by the Gov. What happens if you go back to work, 20 years is a long time to predict what you will do. I'd hate to be pulling a salary, and having to pay taxes on the extra IRA withdraws when they aren't needed at the moment.. all because of a 72T I started 15 years ago.

Or,

Option B.
Plan 5 years out, and convert the necessary money from the IRA to the RIRA each year. (Living on taxable account for 5 years). Then starting in year 5, you have access to your IRA.

I'll take option #2 unless somebody can show me a flaw in the plan. (One known flaw is some States tax IRA-RIRA conversions, but not 72T withdraws, so you have to consider this in the planning)

Laters,
-d.
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