Hello, quick question...if I rolled over a employer sponsored 401k to a taxable individual account does the 10% early withdrawal penalty apply if I was to start taking withdrawals immediately?
Thanks for any information folks
If you are younger than 59 1/2, you must pay the penalty to withdraw from an IRA.
One way around the 10% penalty is a 72t aka SEPP plan, which you can google, but those may not provide adequate withdrawals for your needs and have constraints.
Ok thanks, I figured as much. I’m soon to be 47 years old and think of going part time or retirement earlier than 60.
I was wonder if there is any way around the early withdrawal penalty
Thanks for the response
Depending on the age you retire you might be better off leaving the funds in the 401K. Most 401K's allow penalty free withdrawals at age 55 if you retired in the year you turn 55.
There is also the Roth pipeline option which might be an idea at age 47 and would work if you have a few years of "other money" to tap.
Essentially you start converting a portion of your 401K/taxable IRA to a Roth IRA. You will pay income tax on this but not a penalty. After 5 years you can withdraw the converted money tax and penalty free. You must only withdraw the amount you converted and leave in any gains it has made.
So if you needed $50,000 a year to live on and happened to have $250,000 in taxable already, you could start using that at age 47 while converting $50,000 of your 401K/IRA to a Roth. After age 52, you could start pulling that $50,000 out of the Roth while still converting into the Roth and still having a net taxable amount of $50,000 (since the Roth withdrawal is tax free).
There is also the Roth pipeline option which might be an idea at age 47 and would work if you have a few years of "other money" to tap.
Sorta kinda related, but if you have an inherited IRA you can take withdrawals out of that without the 10% penalty, just the regular tax on the withdrawal amount as ordinary income. New tax rules that went into effect state that you have to take all of the money out by end of 10 years, you can take it however you want: equal, various periodic, or end lump sum. Just need to be fully withdrawn by end of 10 years. That is for inherited IRA after Jan 1, 2020, if my memory is right. Different rules for inherited before that date, but it still allows for penalty-free withdrawals, just no 10 year limit.
Another sorta kinda related, if you have a 403b plan, it allows for withdrawals without the 10% penalty. Same regular tax due as ordinary income.
Strangely enough, I have been wondering if it looks like you (an ER person not you specifically), can retire before 55, and you can see it being possible say 7 years out, would it perhaps make more sense to start a standard brokerage account, vs contributing to a 401k at all? You loose many years of company match, but I wonder if that would be more or less, than the penalty you would have to pay to get at the money early?
Ok thanks, I figured as much. I’m soon to be 47 years old and think of going part time or retirement earlier than 60.
I was wonder if there is any way around the early withdrawal penalty
Thanks for the response
if you are younger than 55. Once 55 the rule of 55 applies.
Wow thank you for the insight.
I’ll definitely be looking in to this as well
I'm using the Roth conversion ladder now. It's called a number of things, including the Roth pipeline, and other similar terms.
Essentially, you can roll the 401(k) to a traditional IRA completely tax and penalty free. You can then do Roth conversions (from traditional IRA to Roth IRA) and pay only income taxes on the converted amounts. Then, on January 1st of the fifth tax year after the year in which the conversion occurs, you can withdraw converted amounts tax- and penalty-free - regardless of your age.
I was originally going to do SEPPs until I learned about the Roth conversion ladder. The latter is more flexible and easier to manage. It's main drawback is that you need to find a way to "prime the pump" - that is, have a way to have money to live on while you're waiting for those five years to pass to get access to your conversions.
What I did was just continue to save until I had a total of five years of expenses between taxable and Roth contributions. That was easy and straightforward to understand, and I didn't dislike my job that much. But there are a couple of other ways to prime the pump: You could "barista FIRE" with a job that just pays basic expenses. You could take out only what you need to live on and pay the 10% penalty. You could start Roth conversions while still working - although this approach probably comes with a high tax cost.
I've always wondered...absent a manual audit, how would anyone ever know?
IIRC, my Roth account is just one big melting pot...contributions & conversions...no separate lots like I have in my taxable accounts.
Contributions, conversions, and distributions are all reported to the IRS, and their computers can do the math. So in theory they could check. Whether they do or not, or are overwhelmed, I don't really know.