Any reason not to 72t?

[Da Nag]

The spouse and I are within 24 months of ER, and I'm fairly certain a 72t is in our future. In fact, I can't see why we wouldn't do it - whether we need the 72t funds early or not.

The details:

- ER at 50-ish (both of us)

- 2 COLA'ed pensions + health benefits at 54

- 401k, 401a, and 457b's (one each for each of us)

Our 457b's will likely carry us through to the pensions, but it will be close. Still, whether we need 72t funds or not, I'm inclined to rollover 100% of the 401k and 401a funds to IRA's, and 72t them immediately when we ER. Reason being - compared to our planned 457b withdrawals, income will almost double once the pensions kick in, placing us in a higher tax bracket. If I 72t as much as possible during the 4 years we're waiting on the pensions, those funds will come out at a much lower tax rate.

For any 72t funds not needed when taken, I'd simply dump them into something low-risk at VG..where they would essentially be liquid, with no effect (other than gains) on our taxable income regardless of when taken out.

Any error to the above logic? Any other reason why I might reconsider?

 

[kaneohe]

If you're willing to pay taxes on those funds anyway, have you considered doing conversion to Roth IRA?

Also have you considered the possible greater creditor protection of the 401K under non-bankruptcy conditions
vs the IRA (depends on state protections also)? http://www.bogleheads.org/forum/viewtopic.php?t=31762&start=0
(not sure about 401a, possibly similar)

 

[Leonidas]

..compared to our planned 457b withdrawals, income will almost double once the pensions kick in, placing us in a higher tax bracket. If I 72t as much as possible during the 4 years we're waiting on the pensions, those funds will come out at a much lower tax rate.

What do you mean by,"72t as much as possible"?

You can make one change in your SEPP to the min distribution method if you started with either the amortization or annuitization methods. I played with the numbers after reading your post using my own situation (age 50 with $400k in the SEPP) and found that by the year I turned 59 1/2, I had only reduced the balance by about $77K. If I were to switch to the MD method at that time I would reduce my annual payments from 18K to a little less than 12K annually. Doesn't look like a huge tax savings to me.

Edit to add: I spitballed some additional numbers here, since you and spouse have multiple accounts, and used a SEPP beginning balance of $1Million. Looks a little better on the payment side with annual payments going from $45K to $29K. You're still stuck with a huge balance at 59 1/2 of about $800K.

Personally I only considered the 72t if I needed the money to live on before 59 1/2. Other than that reason, I'm keeping my rollover IRA as a guard against the pension fund being trashed. My fund is fairly healthy, but I wonder how I would feel about my pension's health if my ex-employer was located in California or Michigan.

 

[Da Nag]

What do you mean by,"72t as much as possible"?

If my understanding of 72t's is correct (big if), we can rollover some or all of our 401k/401a's to IRA's, with one or more 72t's set up. I didn't mean to imply the 72t amount itself was variable - only the number and/or amount of funds in the underlying IRA's.

For us, my thought is that 100% of our non-457b accounts be rolled over, and set up 72t withdrawals based on 100% of the underlying funds/accounts. In short - get as much as possible out sooner rather than later, given our known significantly higher tax bracket 4 years into ER.

 

[Da Nag]

If you're willing to pay taxes on those funds anyway, have you considered doing conversion to Roth IRA?

Also have you considered the possible greater creditor protection of the 401K under non-bankruptcy conditions
vs the IRA (depends on state protections also)? Bogleheads :: View topic - Rollover IRA Judgement Protection
(not sure about 401a, possibly similar)

Hadn't thought about the Roth option, might make sense for some of it - thanks for the tip, I'll look into it. My only concern is availability of funds without penalty...we've plans to build a home right after pensions kick in at 54, and unlike funds already pulled through 72t, the Roth funds would be untouchable without penalty for another 5+ years.

RE creditor protection - yeah, that thought has crossed my mind, and the state we wll be living in (WA) has good protections for the 401k/a funds. Still, my thought is the protections aren't a huge concern for us. We could get by without significant pain on pensions alone, which have as much protection as 401k/a funds. That, combined with a relatively inexpensive umbrella policy might mitigate the loss of protection from rolling things over.

 

[Coach]

Hadn't thought about the Roth option, might make sense for some of it - thanks for the tip, I'll look into it. My only concern is availability of funds without penalty...we've plans to build a home right after pensions kick in at 54, and unlike funds already pulled through 72t, the Roth funds would be untouchable without penalty for another 5+ years.

I never thought about it, but wouldn't you be able to withdraw Roth principal (not earnings) without penalty before the five year limit -- like contributions?

Coach