72 T IRA distribution - Any experience out there

[thepalmersinking]

Fire Calc is returning 100% success rate. Currently 54 and feel that making it to the desirable retirement age of 57 might not be in the cards due to large merger. My biggest issue is the vast majority of funds reside in IRA’s, both traditional and Roth and a fairly sizable 401K.

Seeking thoughts and historical perspectives.

 

[REWahoo]

How long to you are 55? Waiting til then will give you another option for penalty-free 401k fund withdrawals without the constraints of a 72t.

 

[zinger1457]

As stated above if you wait until the year you turn 55 to retire you might be able to dip into that 401K without having to go the 72T route. In any case there's nothing wrong using 72T, just need to understand the rules and make sure it's set up correctly, 72t.net is a good source of information. What are your concerns?

 

[imoldernu]

From age 53 to 70 1/2 we burned through non taxable (cash) assets. It was part of our plan, not being investors per se. I suppose we lost quite a bit, but as a result of what we did, haven't had to pay income taxes since the first few years of retirement.

Most of the cash came from the sale of our home. After 70, we withdrew our IRA's according to schedule.

 

[Sunset]

OP - you may need to check your 401k rules about taking it out at 55 (I'm not sure).

As for the 72t - I looked into it a lot but never did it. However, I would recommend setting up a separate IRA for the 72t , and put as much into it as you need to, to get out what you need according to the rules.
This allows you to have other IRA's not part of the 72t, so you have somewhere to pull out an extra amount of money if needed, without breaking the 72t and causing huge penalties.

 

[KenZ71]

Amazed I never heard of this magical loophole.

Giving me some serious stuff to think about. My career longevity & desire just dropped quite a bit.

 

[Jerry1]

OP - you may need to check your 401k rules about taking it out at 55 (I'm not sure).

When working, I checked my summary plan document and did not find this as a provision that would be allowed. I talked to HR but they were clueless. It’s not an option in every plan and I don’t think it was in mine.

 

[HI Bill]

Amazed I never heard of this magical loophole.

Giving me some serious stuff to think about. My career longevity & desire just dropped quite a bit.

That's why we're here (to learn and help)!

Lots of good info here:

https://72t.net/72t/calculator/distributions

Beware that if you mess up the distributions, the financial implications are huge. But it doesn't have to be an all-or-none proposition. You can hold assets in multiple tax-deferred accounts, and only draw from selected accounts if you wish.

I had planned for years to use SEPP to bridge the years from retirement to 59.5. But I've worked 3 years longer than I planned, and now have enough post-tax investments that I shouldn't need to use it.

Best wishes!

 

[KenZ71]

Is the SEPP acronym in the context of 72t related to Self Employed ___ ___ ? Something else?

 

[braumeister]

Substantially Equal Periodic Payments = SEPP

 

[BigMoneyJim]

My original plan 20 years ago was to use 72t, but now that I'm considering ESR around age 50 with highly variable earned income and a pension eligibility kicking in at age 55, I think I've decided to just take the 10% penalty on any retirement fund withdrawals before I'm 59.5 as I'll be in the 10% or 12% tax bracket when I do, and 72t isn't flexible enough for my situation, and I don't have the time to build a Roth ladder, and it would cost as much in today taxes to do Roth conversions as it would to pay the penalty later. (Wow, that was one sentence.)

If I had to do it all over again I might have tried harder to build up Roth IRAs at tax-convenient times.

Here is a good brief overview of accessing retirement money early: https://www.madfientist.com/how-to-access-retirement-funds-early/

Edit: Yeah, if your sizeable 401k is at your current company or if you could roll it there, the retire at 55 option might work for you. I don't think I can wait that long, but we'll see.

 

[Sunset]

My original plan 20 years ago was to use 72t, but now that I'm considering ESR around age 50 with highly variable earned income and a pension eligibility kicking in at age 55, I think I've decided to just take the 10% penalty on any retirement fund withdrawals before I'm 59.5 as I'll be in the 10% or 12% tax bracket when I do, and 72t isn't flexible enough for my situation, and I don't have the time to build a Roth ladder, and it would cost as much in today taxes to do Roth conversions as it would to pay the penalty later. (Wow, that was one sentence.)

If I had to do it all over again I might have tried harder to build up Roth IRAs at tax-convenient times.

Here is a good brief overview of accessing retirement money early: https://www.madfientist.com/how-to-access-retirement-funds-early/

Edit: Yeah, if your sizeable 401k is at your current company or if you could roll it there, the retire at 55 option might work for you. I don't think I can wait that long, but we'll see.

I would try REALLY HARD not to pay a 10% penalty (on top of taxes).
Why could you not rollover your 401K to an IRA.
Then split the IRA by transfer to another IRA, so you have 2 IRA's.
Then you 72t one of them, and the other one is kept normal for extra income as needed.

 

[mattbaxx]

I set up a 72t in late 2016 to bridge us until I hit 59 1/2 in 2021. Right on the sweet spot of hitting the five year minimum. It is set to automatically end at that point.

The set up at Fidelity was easy. Completed all the paperwork in fact while traveling around the country and stopping in at a couple of different Fidelity offices. I had read up on it for a couple of years so I was well versed on what to do and how to do it. Since I began it the IRA balance has grown despite the withdrawals. The distribution is recalculated every year so I even got a bit of a raise from 2017 to 2018.

 

[CyclingInvestor]

Lots of good info here:

https://72t.net/72t/calculator/distributions

Beware that if you mess up the distributions, the financial implications are huge. But it doesn't have to be an all-or-none proposition. You can hold assets in multiple tax-deferred accounts, and only draw from selected accounts if you wish.

Best wishes!

++

I retired at 48, with 90% of my assets in IRAs. My big IRA (80% of assets) was 72t'ed for 12 years until 2018, when I turned 59.5. My little IRA (10%) was reserved for special expenses.

A one page spreadsheet was plenty to calculate the exact withdrawal each year (and it must be exact). The 72t website mentioned above was very useful in understanding the rules.

 

[gauss]

When working, I checked my summary plan document and did not find this as a provision that would be allowed. I talked to HR but they were clueless. It’s not an option in every plan and I don’t think it was in mine.

Plans documents do not need to make any reference to rule of 55 in order for it be allowed.


What is needed is for the employer plan to allow PARTIAL distributions.

Some plans will only allow total distributions and this would complicate the strategy.

On a separate note, OP could withdrawal all of his/her Roth IRA contributions tax and penalty free at any time also. This is what I ended up doing in lieu of 72(t).

-gauss

 

[eroscott]

Fire Calc is returning 100% success rate. Currently 54 and feel that making it to the desirable retirement age of 57 might not be in the cards due to large merger. My biggest issue is the vast majority of funds reside in IRA’s, both traditional and Roth and a fairly sizable 401K.

Seeking thoughts and historical perspectives.

We are doing SEPP/72t on two tIRAs. Obviously you have to pay taxes on this so make sure you account for that.

We did this with Fidelity and their calculations did not match up to the 3 calculators I found online. But they matched each other. Fidelity could not explain this. It was only off by a few hundred dollars so I just let Fidelity do their own calculations otherwise they would have to use a different distribution code. I wanted the normal SEPP/72t one. Simple in TurboTax for us as it lets you select SEPP as the exception.

We use money from the tIRA via 72t and also will pull non-taxed contributions from our ROTH IRAs until we get to 59.5.

Cautions ... if you are wanting to consider ACA subsidies your MAGI does take into account the tIRA 72s ... but does not take into account your ROTH IRA withdrawals (good).

Also it was handy taking the forms to the local Fidelity office so they didn't need a Master Nortary.

 

[SecondCor521]

I retired at 46 and chose to do the Roth ladder because it fit my situation and I was a little worried about a ~13 year 72t with respect to the lack of flexibility. Had I done a 72t I would have split my IRA into two (or more) as others have described.

If I were retiring at 54 I would have minimal to no concerns about a 72t, because the shorter time frame would make it a very reasonable option. With today's interest rates, the calculated amount is probably about the right amount to take and spend anyway.

 

[zinger1457]

Be aware that if doing a 72t you will likely have to tie up a sizable amount in the IRA you will use for the 72t to generate the income you're looking for. With todays interest rates someone 54yo would need ~$1M to generate ~$46K in annual income using 72t.

 

[SecondCor521]

Be aware that if doing a 72t you will likely have to tie up a sizable amount in the IRA you will use for the 72t to generate the income you're looking for. With todays interest rates someone 54yo would need ~$1M to generate ~$46K in annual income using 72t.

It's been a very long time since I looked at it, but I dimly recall that one does have some flexibility in the interest rate chosen. I think you can choose up to 120% of the mid-term rate if you want.

There are also three different methodologies for withdrawal calculations, and one can switch methodologies under certain limited circumstances. I think the other two methods might result in higher effective withdrawal rates.

72t.net probably has all the details.

 

[zinger1457]

It's been a very long time since I looked at it, but I dimly recall that one does have some flexibility in the interest rate chosen. I think you can choose up to 120% of the mid-term rate if you want.

There are also three different methodologies for withdrawal calculations, and one can switch methodologies under certain limited circumstances. I think the other two methods might result in higher effective withdrawal rates.

72t.net probably has all the details.

I used the bankrate.com 72t calculator to get the numbers listed above but looking at it closer it appears they are using old (2017) interest rates that are much lower than todays. The calculator on 72t.net yields a max of ~$55K with $1M.

 

[teejayevans]

Be aware that if doing a 72t you will likely have to tie up a sizable amount in the IRA you will use for the 72t to generate the income you're looking for. With todays interest rates someone 54yo would need ~$1M to generate ~$46K in annual income using 72t.

You don’t need to tie up anything, once rate is set, you can choose which fund to withdraw from: stock, bond, or money market. I generally choose the one is up for the year, otherwise I pull out short bond fund.

 

[kjpliny]

You can leave work in the year you turn 55 and withdraw from a 401k without penalty...you don't actually have to be 55. This assumes your plan allows for it.

 

[38Chevy454]

You can leave work in the year you turn 55 and withdraw from a 401k without penalty...you don't actually have to be 55. This assumes your plan allows for it.

Bold part by me, therein lies the key. Some don't have that allowable under their plan. Also if you are under 55 when you leave working, it becomes a different question because 401k is not able to withdraw from without penalty unless you do a 72t type withdrawal.

 

[gauss]

Bold part by me, therein lies the key. Some don't have that allowable under their plan. Also if you are under 55 when you leave working, it becomes a different question because 401k is not able to withdraw from without penalty unless you do a 72t type withdrawal.

Why are folks under the impression that the employer plan has to allow this?

This is between the taxpayer/employee and the IRS.

You can claim the exemption on IRS From 5329 if the 1099-R issued by the plan does not specifically address it (ie code 1 vs code 2 in box 7).

All that is needed is for the plan to allow partial withdrawls.

If you think something more is needed in the employer plan, then please cite a source for this.

This seems to be one of the most misunderstood concepts on this board.

Most plans are silent on this issue -- and that is not a problem.

-gauss

 

[Al18]

The 'rule of 55' was not mentioned in my 401K Summary Plan Description (SPD), but it was mentioned in the Distribution Notice, available by the 401K provider online. The 401K representative confirmed partial withdrawals are allowed under my plan and no limit on the number of withdrawals I could make - your plan may be different. The withdrawal process is all done online and easy. There is a mandatory 20% Federal tax withholding on 401K withdrawals, and state tax withholding is optional.