Cute Fuzzy Bunny said:
You can use a loophole called a "72t" which allows you to withdraw your IRA in "substantially equal payments" annually for the rest of your life. You'll have to fill out a worksheet and do a little extra math every year, but its not only doable, a good number of retirees use the option.
In a nutshell and way oversimplified, if the IRS, according to their life expectancy tables, expects you to live another 25 years, you can take 1/25th of your IRA total each year.
The bad news is some guy from the IRS comes over after the 25th year and shoots you.
I researched using SEPPs for a rollover payment I'll get as part of my pension. When I stop burning all of my accumulated leave I'll go from near full pay to just my pension and investments and I was thinking I might want to use SEPPs to make up for the difference between the paycheck and the pension check.
You use IRS tables to determine the number of years left on the planet and an IRS mandated assumed interest rate on how much money you have in the account (it was 4.5 % when I was looking at this two years ago). Then you have your choice of three different ways to calculate how much you have to withdraw each year. As I recall, one of the three was very conservative and the other two were more aggressive but very close to each other in terms of how much money you withdrew. You have to withdraw for at least five years or until you reach 59 1/2 - whichever is longer.
If you screw it up, the penalty is much worse than getting shot - they come take 10% of all the money and leave you behind (plus you pay taxes on it all as if it were earned income). My pension rep warned that such screw ups could affect not only the account you were taking money out of, but that it could affect the tax status of other retirement funds as well. I'm not clear on exactly what that last issue was all about, but I do remember that he warned me to be very careful to make sure I stuck with the SEPP program and did it right or risk paying penalties on my pension as well. The reason for that may have to do with how the lump sum is paid in our case (some of it comes from the pension itself) and not a concern in most peoples' cases - but the danger of paying taxes and penalties on the whole IRA is bad enough.
According to my pension rep, one issue to be aware of is that not all institutions where you can have an IRA are familiar with SEPPs and how to do them - or want to mess with them. So, that is an important issue to have resolved before you roll over any funds.
Also, since you mentioned 401Ks I have to say I'm not eligible so I'm not sure how that would work. But, I seem to recall that you can only do SEPPs from a regular IRA. Somebody else here can answer this question, but I'm assuming you can roll a 401 into a regular IRA which would resolve that problem.
There is a good calculator at this site
http://www.finance.cch.com/sohoApplets/Retire72T.asp. And, if you go to the IRS site and search for "72(t)" you can get a ton of info there - or you could google the same phrase.
If you need the extra income to bridge the gap to 59 1/2 then SEPPs are not a bad way to go. I've ruled them out because it looks like I'll have the money from other sources, but as a friend told me recently, there's nothing that says you have to actually
spend the money you withdraw via 72(t). His plans were to make the withdrawals and then deposit them in some other investment vehicle. We're both in our 40's and a long way from 59 1/2. He said it made sense to use 72(t) to build up a lump sum that was his emergency fund. In SEPPs your withdrawals are limited, and if you have a need for a large sum of cash that you have to withdraw from retirement accounts you are going to take a huge penalty and tax loss. His way would allow him to build a reserve that he could use whenever and however he wanted without incurring penalties or taxes on the entire IRA. I haven't wargamed that scenario yet, so do your own research there.
