§72(t)(2)(A)(v) "rule of 55" early withdrawals as a bridge

[The Onceler]

I'm far from knowledgeable on this. Very far. But let's say one has 401k holdings that might trigger confiscatory taxes once RMDs are required.

If a DBP can be delayed and SS can be delayed can a bridge with early §72(t)(2)(A)(v) early withdrawals take the place of taxable amounts used as a bridge?

1. Delay DBP until 65. Avoid early commencement reduction.

2. Delay SS until 70.

3. Tap 401k at say 57 upon RE. Tap it hard for all needs.

4. Leave taxable accounts alone.

5. When DBP is tapped at 65, the 401k will have been depleted but overall income stream would have been smoothed and RMDs at 70 lessened in impact.

At least that is my working hypothesis.

Anyone done this or have ideas or comments? Again I know so little I don't even know what I don't know.

 

[RunningBum]

I would look at getting the 401K converted to a Roth and spending out of taxable. You accomplish the same thing except you have money sitting in a Roth where it will grow tax free as opposed to being in a taxable account. This is what I'm doing. Even if you don't have enough taxable to last, getting as much as you can in a Roth seems good. Maybe there's something about your details that keeps this from being the best plan.

 

[JoeWras]

Looks like a math equation. I had flashbacks of college. I can't parse this!

 

[CyclingInvestor]

My retirement of 11 years so far has been financed mostly by 72t withdrawals. I turn 59.5 next year, so no more restrictions. A small Excel spreadsheet is all it took to caalculate each annual withdrawal.

 

[jazz4cash]

§72(t)(2)(A)(v) "rule of 55" early withdrawals as a bridge

The ultimate resource for 72t is www.72t.net. 72t is really only a help to bridge to 59.5. After that you can just withdraw from 401k or IRA w/o penalty. 72t is limited to reasonable interest rates which are quite low these days.

Edit:
Also, rule of 55 is not related to 72t. If you qualify for it there is no need for a 72t.

 

[bada bing]

I would look at getting the 401K converted to a Roth and spending out of taxable. You accomplish the same thing except you have money sitting in a Roth where it will grow tax free as opposed to being in a taxable account. This is what I'm doing. Even if you don't have enough taxable to last, getting as much as you can in a Roth seems good. Maybe there's something about your details that keeps this from being the best plan.

+1
This is pretty much the right answer for the details in the OP.
Roth space is a lot more valuable than taxable space. Live off of
taxable and convert each year up to the top of whatever bracket
you anticipate being in at RMD age or until you get all tax deferred
converted.

I'm planning on the same thing except my pension can be deferred until
age 70 along with SS.

 

[PoorOldCountryBoy]

72t

Doing a 72t enabled retirement at 50 for me. Alas, I was too good a saver early on so felt better getting some out of the retirement accounts. We were more worried about high taxes on withdrawals after 70, so this helps smooth things out for us. And did I mention we retired?

72t.net gives you everything needed to calculate, but make sure you use the IRS publications for actual figures. Two options are difficult to calculate (annuity related math), but the calcs using life expectancies are easy to do on a spreadsheet or even on paper with a calculator. Just keep perfect records, including the IRS pubs you have used to figure.

One important note--if you want to use only a part of your accounts make sure that you have only the amount you want to use in that account you are withdrawing from. That may mean doing a split before withdrawing anything.

 

[bingybear]

I would not mess with the 72t if your 401k allows the rule of 55. What is best really depends on your situation, but I would look at the trade-offs on roth conversions vs living off distributions. Some diversification in tax-ability is often the best

 

[Trawler]

Not sure of your situation but I looked at 72T and did not like you had to take money every year there after for a period of time. I did not want to be forced to take if market was down. We did they following; 55 RULE once on wife's investments as she retired at 55 to add to our non IRA investments, we live off our non IRA assets, ROTH conversions to manage income to qualify and maximize ACA healthcare subsidy. If current tax law remains when we get to Medicare age we will convert more to reduce RMD and delay SS. If we need more nontaxable income we will dip into Roth as it will have been in over 5 years and we both will be 59.5 by then.

 

[The Onceler]

Thanks all. Lots to consider. I think we'll end up with a combination of 55 rule+Roth conversions too if our plans allow it. I think I can defer my dbp benefits indefinitely, but with no allowance for actuarial increase after 70. It would be ironic to accept an effective dbp accrual penalty to avoid a tax bite. Going to be seeking some professional advice.

 

[Big_Hitter]

I think I can defer my dbp benefits indefinitely, but with no allowance for actuarial increase after 70.

no, in general you can't. you generally have to take it at the plan's defined NRA

 

[brainsagolfer]

Forced 72t withdrawals?

Not sure of your situation but I looked at 72T and did not like you had to take money every year there after for a period of time. I did not want to be forced to take if market was down. We did they following; 55 RULE once on wife's investments as she retired at 55 to add to our non IRA investments, we live off our non IRA assets, ROTH conversions to manage income to qualify and maximize ACA healthcare subsidy. If current tax law remains when we get to Medicare age we will convert more to reduce RMD and delay SS. If we need more nontaxable income we will dip into Roth as it will have been in over 5 years and we both will be 59.5 by then.

I believe the 72t program DOES allow you to take out less than the amount designated. You just cannot take out MORE without paying the 10% penalty.

 

[DawgMan]

Perhaps a dumb question as I have not dug into the 72T rules, but if you have multiple tax differed accts (i.e. SEP, a couple 401Ks) and do not have access to the rule 55 early 401K tap in, can you cherry pick just say one of your tax differed accounts and implement 72T, or are all subject to the withdrawal formula?

 

[CyclingInvestor]

Each IRA is a separate case. I only 72t withdrew from my big IRA, and kept the smaller one in case an emergency arose.

 

[jazz4cash]

Perhaps a dumb question as I have not dug into the 72T rules, but if you have multiple tax differed accts (i.e. SEP, a couple 401Ks) and do not have access to the rule 55 early 401K tap in, can you cherry pick just say one of your tax differed accounts and implement 72T, or are all subject to the withdrawal formula?

When I read up on 72t (years ago), it was suggested to use a single IRA for your 72t even if you had to set up a new rollover IRA. I would think you would use a conservative AA for your 72t IRA. Rates are so low that this tool is not so useful anymore.

 

[growing_older]

I believe the 72t program DOES allow you to take out less than the amount designated.

That is not what I was told. As explained to me, you can segregate your IRA accounts and only take 72t from the one(s) you select, but once started you must take the distribution for the specified number of years or until age 59.5, whichever is longer.

 

[zinger1457]

That is not what I was told. As explained to me, you can segregate your IRA accounts and only take 72t from the one(s) you select, but once started you must take the distribution for the specified number of years or until age 59.5, whichever is longer.

I believe you are correct in the need to continue taking distributions but it is possible to change the yearly amount received depending on the 72t distribution method selected. The required minimum distribution method is recalculated once each year based on the balance of your account. I believe you can also do a one time switch from one of the two fixed distribution methods to the required minimum method.