Ahhh...............taxes

[jime444]

Need a little help or maybe just a shove in the right direction for partial enlightenment.

Bear with me, just a little background, first:
DW and I, early fifties 3-4 years from FIRE, 55/56 or we think (Firecalc say fire away easy then); $1.3M mostly deferred now; 457,401k, traditional IRA's. About 7-8 accounts, some already consolidated to IRA's (didn't want to do all of them, just in case) Some taxable monies, $150k or so, short term 6mo liquid, not really counted.

Concerned about the taxes and 10% penalty pre 59.5 and any other stumbling (unknown) blocks with respect to this issue. I'll certainly appreciate input or your previous experiences:
1. I beleive the 457's are ok once the DW get's to 55 and "retires", how about my 401k? Previous 401k not rolled? Penalties? I thought it depends on the plan administrator rules (made-up)? Contact each one independantly, I guess?
2. Any other recommnedations for rollovers or different planning?
3. Or, do I bite the bullet and get a tax accountant to help me out?

Thanks in advance. James

 

[samclem]

Smarter folks than I will chime in here shortly I'm sure. It seems your situation is that 401K/403/tIRA money won't be available without penalty until you are 56 1/2 and you are concerned about paying the bills from 55/56 until then, right? I think your main answer is going to be the rule known as 72t which relies on "substantially Equal Periodic Payments" (SEPP). You can do a search here to find out more,but this allows you to access the money early without the 10% penalty, but there are some restrictions.

 

[Lazarus]

Does your employer allow you to leave your money in the 401k after retirement? If so you can take money out after retiring at 55 or older without penalty. (If they allow annual distributions.) I can take money out twice a year if I want. Haven't done so yet though I take the dividends.

 

[Gumby]

As I understand the rules, you can take money without penalty (but still with the tax consequences of that income) if: 1) you are 55 or older; 2) you have retired directly from that job; and 3) if your 401k plan allows it (i.e. -- you may be forced to take a lump sum, which would be a big slug of taxable income, if your 401k does not allow smaller distributions.)

If you would be forced by the 401k plan to take a lump sum and you don't want to pay the taxes inherent in that, do a rollover to an IRA and then use 72t distributions if you need some the money. This is also the only way you can get the 401k money from a previous employer without penalty -- rollover and 72t.

 

[frayne]

As I understand the rules, you can take money without penalty (but still with the tax consequences of that income) if: 1) you are 55 or older; 2) you have retired directly from that job; and 3) if your 401k plan allows it (i.e. -- you may be forced to take a lump sum, which would be a big slug of taxable income, if your 401k does not allow smaller distributions.)

If you would be forced by the 401k plan to take a lump sum and you don't want to pay the taxes inherent in that, do a rollover to an IRA and then use 72t distributions if you need some the money. This is also the only way you can get the 401k money from a previous employer without penalty -- rollover and 72t.

That is also my understanding.

 

[nun]

As soon as the owner "separates from service" you can take income from the 457 without penalty, you obviously have to pay income tax. My 457 is a big part of how I'll fund the ER years before 59.5

 

[Niko]

Congrats on getting so close!

DW and I, early fifties 3-4 years from FIRE, 55/56 or we think (Firecalc say fire away easy then); $1.3M mostly deferred now; 457,401k, traditional IRA's. About 7-8 accounts, some already consolidated to IRA's (didn't want to do all of them, just in case) Some taxable monies, $150k or so, short term 6mo liquid, not really counted.

Let me just say, I really like how concisely you laid out your financial picture. You said in 50 words what some can't say in 500!

Concerned about the taxes and 10% penalty pre 59.5 and any other stumbling (unknown) blocks with respect to this issue.

***

2. Any other recommnedations for rollovers or different planning?

Someone already mentioned 72t, and I'll echo that. I'm younger than you but I'm already building the SEPP provision into my early retirement plans. In addition, to the extent you have Roth IRAs, you can withdraw the contributions* penalty free before 59.5. Finally, if you're pulling the plug at 55-56, you only have a 4-year gap to cover. You might be able to cover most or all of that from your liquid accounts if you already have $150K liquid plus 6 months' emergency.

Do you have a health care gap plan in place?

*Only contributions, not gain. I believe there's IRS guidance somewhere on how to calculate this and keep track of your contributions over the years. I had to do it several years ago for an emergency expense that I couldn't cover from my liquid funds.

 

[csgraff]

As soon as the owner "separates from service" you can take income from the 457 without penalty, you obviously have to pay income tax. My 457 is a big part of how I'll fund the ER years before 59.5

My understanding also. I have a 457 which was a deferred comp account from work. I had also earmarked it to tap before 59.5, if needed. Paying taxes out of it will hurt. No matter how much you tell yourself it has to happen, its hard to deduct taxes in your head when you look at the account.

 

[pb4uski]

If I were in your shoes I would figure out what accounts can be accessed without penalty prior to 59 1/2 if you or DW retire after age 55. Sounds like the 457 and possible the 401ks. Then see if your taxable accounts and those accessible sources of funds can provide you living expenses from when you RE to 59 1/2.

If they are insufficient, between now and RE build up your taxable accounts to fill the gap.