10% early w/d penality

[JohnDoe]

Is there anyway around the 10% penality when you w/d money from an IRA or 401k when you ER?

I guess this should be added to your yearly expenses when doing calculations for how much you think you'll need annually.

JD

[crazy connie]

YES there is! If you are under age 59.5 you can do a SEPP (Substantial Equal Periodic Payments) under 72T of IRS Code. Search the terms 72T and SEPP and do some reading before making the plan up. You may be pleasantly suprised.

[JohnDoe]

Thanks!

What ridiculous tax laws we have!

[jazz4cash]

72T is a great way to go, check www.72t.net. The trick is to guestimate what your shortfall will be, then put that amount into a seperate IRA, and annuitize that IRA. There is also a lot of flexibility in the assumed interest rate for the annuitization and various methods to select. You generally must stick with the SEP Plan 5 yrs or till age 59.5.

You can also avoid penalty for 401k withdrawal if seperated from employer at age 55........I've seen several interpretations on this one.

A third exception is for home purchase expense, 1st time homeowner, I believe.

College expenses for dependents are also excepted from the penalty (my favorite!)

Medical expenses above the schedule A threshold are also excepted, I think

Tax code is ridiculous until you find the right loophole, then its not so bad

[Khan]

Quote:

Originally Posted by jazz4cash 72T is a great way to go, check www.72t.net. The trick is to guestimate what your shortfall will be, then put that amount into a seperate IRA, and annuitize that IRA. There is also a lot of flexibility in the assumed interest rate for the annuitization and various methods to select. You generally must stick with the SEP Plan 5 yrs or till age 59.5. You can also avoid penalty for 401k withdrawal if seperated from employer at age 55........I've seen several interpretations on this one. A third exception is for home purchase expense, 1st time homeowner, I believe. College expenses for dependents are also excepted from the penalty (my favorite!) Medical expenses above the schedule A threshold are also excepted, I think Tax code is ridiculous until you find the right loophole, then its not so bad

Whichever comes later.

[gindie]

Quote:

Originally Posted by jazz4cash You can also avoid penalty for 401k withdrawal if seperated from employer at age 55........I've seen several interpretations on this one.

Do you have to separate at exactly age 55 or can it be 56, 57, etc.? I've never gotten clarification on this.

[crazy connie]

Quote:

Originally Posted by gindie Do you have to separate at exactly age 55 or can it be 56, 57, etc.? I've never gotten clarification on this.

It has to be anytime in the year you turn 55 with access to the funds after your birthday. So quit on 01/01 and turn 55 in June and you can tap in without penalty in July or any time after that.

[REWahoo]

Quote:

Originally Posted by gindie Do you have to separate at exactly age 55 or can it be 56, 57, etc.? I've never gotten clarification on this.

What Connie said. I found this at the 401khelpcenter.com

There is an exception to that rule [the 10% penalty], however, which allows an employee who retire, quit or are fired at age 55 to withdraw without penalty from their 401k.

There are two key points early retirees need to know. First, this exception applies if you leave your job at any time during the calendar year in which you turn 55, or later, according to IRS Publication 575.

Second, you can only take money from the 401k plan of your last employer. That means if you left money in the plan of a former employer, you'll have to wait until age 59½ to start taking withdrawals without penalty.

[REWahoo]

Here is what Pub 575 says about the 10% tax:

The tax does not apply to distributions that are:
• From a qualified retirement plan (other than an IRA)
after your separation from service in or after the year
you reached age 55...

[samclem]

Quote:

Originally Posted by jazz4cash Tax code is ridiculous until you find the right loophole, then its not so bad

Nope. It is still ridiculous.

[crazy connie]

Quote:

Originally Posted by REWahoo! What Connie said. I found this at the 401khelpcenter.com There is an exception to that rule [the 10% penalty], however, which allows an employee who retire, quit or are fired at age 55 to withdraw without penalty from their 401k. There are two key points early retirees need to know. First, this exception applies if you leave your job at any time during the calendar year in which you turn 55, or later, according to IRS Publication 575. Second, you can only take money from the 401k plan of your last employer. That means if you left money in the plan of a former employer, you'll have to wait until age 59½ to start taking withdrawals without penalty.

But, if you severed before age 55 from an employer (think Mega-Corp) and then roll your funds to a new employer (think Circle K, Walgreens, etc..) and sever in year of age 55... BINGO you meet the criteria. I am contemplating that right now with a basic McJob. I am just nervous about locking in on 72T Distribution for 5 years.

[jazz4cash]

Quote:

Originally Posted by crazy connie But, if you severed before age 55 from an employer (think Mega-Corp) and then roll your funds to a new employer (think Circle K, Walgreens, etc..) and sever in year of age 55... BINGO you meet the criteria. I am contemplating that right now with a basic McJob. I am just nervous about locking in on 72T Distribution for 5 years.

Not sure what the nervousness relates to, but I believe you can re-roll the SEP one time within the 5 years. There are various other strategies to mitigate certain issues. The thing to be nervous about is not following the requirements such that the penalty for early withdrawal is reinstated for all the monies withdrawn.

[crazy connie]

Quote:

Originally Posted by jazz4cash Not sure what the nervousness relates to, but I believe you can re-roll the SEP one time within the 5 years. There are various other strategies to mitigate certain issues. The thing to be nervous about is not following the requirements such that the penalty for early withdrawal is reinstated for all the monies withdrawn.

You can change the method one time and only to the lowest payout level (Minimum Distribution Method) as I understand the regulations. My nervousness is only in tapping too much and having several down years in a row or not enough and then being short. During the 5 to 7 years I would be on a SEPP plan it is likely my housing will downsize and that will be a healthy cash infusion. I am debating breaking the IRA funds into more than 1 pot. As in 1 for SEPP stating in 2009 and a smaller one held in abeyance and for ROTH conversions.

[newbie_fire]

How about rolling over the IRA into ROTHs (a "little" every year). Then one can withdraw the "contributions" (amounts rolled over) from the ROTHs penalty free anytime.

For the "gains" in the ROTH however, one will need to wait 5 years to start withdrawing, but at least this helps with avoidng penalty for the contributions (amounts rolled over from IRA)

This is my understanding from reading up about IRAs and ROTHs. I'm a newbie at this, so please shoot this down if its not accurate or feasable. I have a feeling that this might be too "simple" to be true and I'm also weary of the fact that no-one else has mentioned this.

Thank You

[gindie]

newbie_fire -

Better be sure that rollovers can be considered "contributions".

Also, remember that the 5-year clock for Roth withdrawals begins at the time the Roth is orignally established and not when each contribution is made.

[jazz4cash]

Quote:

Originally Posted by crazy connie You can change the method one time and only to the lowest payout level (Minimum Distribution Method) as I understand the regulations. My nervousness is only in tapping too much and having several down years in a row or not enough and then being short. During the 5 to 7 years I would be on a SEPP plan it is likely my housing will downsize and that will be a healthy cash infusion. I am debating breaking the IRA funds into more than 1 pot. As in 1 for SEPP stating in 2009 and a smaller one held in abeyance and for ROTH conversions.

Connie.....you sound like you are on the right track. I am confident that by the time you do a bit more homework, you will be an expert. I was going to suggest TWO SEPP Plans, but I can't recall the rules anymore. As I recall the idea is to split the funds into several IRAs, if necessary. In addition to the one-time change of methods, I believe you can also "recalculate" the payout annually which helps keep the plan in-tact. Have you checked www72t.net? I downloaded the online reference manual there, but by the time I finished reading, I found another way to go.

[spideyrdpd]

What happened to the guy that always posts he has x dollars in cash/liquid investments.
As mentioned you can just have enough in the roth. Since you can take out the contributions with no tax and no penalties .