10% Penalties

[SSMRI74]

Hello, quick question...if I rolled over a employer sponsored 401k to a taxable individual account does the 10% early withdrawal penalty apply if I was to start taking withdrawals immediately?

Thanks for any information folks

[Plantman]

If you are younger than 59 1/2, you must pay the penalty to withdraw from an IRA.

[pb4uski]

+1... so it depends on how young the Young Dreamer is.

ETA: Oops, I misread it as beig rolled over to a traditional IRA. Transfer to a taxable account i a taxable withdrawal and would include tax and a 10% penalty if the owner is less than 59 1/2.

[cathy63]

Quote:

Originally Posted by SSMRI74 Hello, quick question...if I rolled over a employer sponsored 401k to a taxable individual account does the 10% early withdrawal penalty apply if I was to start taking withdrawals immediately? Thanks for any information folks

Normally a 401k would be rolled over to a traditional IRA, not a taxable individual account. That rollover itself would not be taxable, but any withdrawals from the tIRA would be taxed as ordinary income, plus there would be a 10% penalty if you are under 59 1/2 and none of the exceptions apply.

If you are at least 55 and need to use this money, then look into keeping the money in the 401k and using the Rule of 55 to access it instead. You can also look into SEPP (substantially equal periodic payments) which qualify for an exception to the 10% penalty.

If you do transfer your 401k to a taxable account instead of a tIRA, then the 10% penalty and all the taxes will be due in the year that you make the transfer. After that, you'll only pay taxes on any earnings in the account.

[SSMRI74]

Quote:

Originally Posted by Plantman If you are younger than 59 1/2, you must pay the penalty to withdraw from an IRA.

Ok thanks, I figured as much. I’m soon to be 47 years old and think of going part time or retirement earlier than 60.

I was wonder if there is any way around the early withdrawal penalty

Thanks for the response

[pb4uski]

One way around the 10% penalty is a 72t aka SEPP plan, which you can google, but those may not provide adequate withdrawals for your needs and have constraints.

[SSMRI74]

Quote:

Originally Posted by pb4uski One way around the 10% penalty is a 72t aka SEPP plan, which you can google, but those may not provide adequate withdrawals for your needs and have constraints.

Ok thank you very much, I’ll do some research on that SEPP plan....hopefully it’s something that will work for us.

Thanks again

[Aerides]

It's not only the penalty, but all immediately taxable, if you roll it over into a non-IRA account.

This is why it's incredibly important for ER-planners to save both taxable, and tax-advantaged "eggs" to avoid the cost of early dipping.

[scrabbler1]

Another rather obscure exception to the 10% penalty is if the 401k has any company stock in it and you cash it out using NUA and its rules: the value of the stock over its par (cost) basis would not be subject to the 10% penalty because it is considered LTCG.

[zinger1457]

Quote:

Originally Posted by SSMRI74 Ok thanks, I figured as much. I’m soon to be 47 years old and think of going part time or retirement earlier than 60. I was wonder if there is any way around the early withdrawal penalty Thanks for the response

Depending on the age you retire you might be better off leaving the funds in the 401K. Most 401K's allow penalty free withdrawals at age 55 if you retired in the year you turn 55.

[SSMRI74]

Quote:

Originally Posted by zinger1457 Depending on the age you retire you might be better off leaving the funds in the 401K. Most 401K's allow penalty free withdrawals at age 55 if you retired in the year you turn 55.

Thank you I’ll be 47 this year, so 55 is not to far off, that’s definitely my best option. I’m currently doing my research on or how I may retire sooner
Thank you sooo much for the response

[Fermion]

There is also the Roth pipeline option which might be an idea at age 47 and would work if you have a few years of "other money" to tap.

Essentially you start converting a portion of your 401K/taxable IRA to a Roth IRA. You will pay income tax on this but not a penalty. After 5 years you can withdraw the converted money tax and penalty free. You must only withdraw the amount you converted and leave in any gains it has made.

So if you needed $50,000 a year to live on and happened to have $250,000 in taxable already, you could start using that at age 47 while converting $50,000 of your 401K/IRA to a Roth. After age 52, you could start pulling that $50,000 out of the Roth while still converting into the Roth and still having a net taxable amount of $50,000 (since the Roth withdrawal is tax free).

[SSMRI74]

Quote:

Originally Posted by Fermion There is also the Roth pipeline option which might be an idea at age 47 and would work if you have a few years of "other money" to tap. Essentially you start converting a portion of your 401K/taxable IRA to a Roth IRA. You will pay income tax on this but not a penalty. After 5 years you can withdraw the converted money tax and penalty free. You must only withdraw the amount you converted and leave in any gains it has made. So if you needed $50,000 a year to live on and happened to have $250,000 in taxable already, you could start using that at age 47 while converting $50,000 of your 401K/IRA to a Roth. After age 52, you could start pulling that $50,000 out of the Roth while still converting into the Roth and still having a net taxable amount of $50,000 (since the Roth withdrawal is tax free).

Wow thank you for the insight.
I’ll definitely be looking in to this as well

[NgineER]

Quote:

Originally Posted by Fermion There is also the Roth pipeline option which might be an idea at age 47 and would work if you have a few years of "other money" to tap.

+1

this is our plan

[38Chevy454]

Sorta kinda related, but if you have an inherited IRA you can take withdrawals out of that without the 10% penalty, just the regular tax on the withdrawal amount as ordinary income. New tax rules that went into effect state that you have to take all of the money out by end of 10 years, you can take it however you want: equal, various periodic, or end lump sum. Just need to be fully withdrawn by end of 10 years. That is for inherited IRA after Jan 1, 2020, if my memory is right. Different rules for inherited before that date, but it still allows for penalty-free withdrawals, just no 10 year limit.

Another sorta kinda related, if you have a 403b plan, it allows for withdrawals without the 10% penalty. Same regular tax due as ordinary income.

[armor99]

Quote:

Originally Posted by 38Chevy454 Sorta kinda related, but if you have an inherited IRA you can take withdrawals out of that without the 10% penalty, just the regular tax on the withdrawal amount as ordinary income. New tax rules that went into effect state that you have to take all of the money out by end of 10 years, you can take it however you want: equal, various periodic, or end lump sum. Just need to be fully withdrawn by end of 10 years. That is for inherited IRA after Jan 1, 2020, if my memory is right. Different rules for inherited before that date, but it still allows for penalty-free withdrawals, just no 10 year limit. Another sorta kinda related, if you have a 403b plan, it allows for withdrawals without the 10% penalty. Same regular tax due as ordinary income.

Strangely enough, I have been wondering if it looks like you (an ER person not you specifically), can retire before 55, and you can see it being possible say 7 years out, would it perhaps make more sense to start a standard brokerage account, vs contributing to a 401k at all? You loose many years of company match, but I wonder if that would be more or less, than the penalty you would have to pay to get at the money early?

[Sunset]

Quote:

Originally Posted by armor99 Strangely enough, I have been wondering if it looks like you (an ER person not you specifically), can retire before 55, and you can see it being possible say 7 years out, would it perhaps make more sense to start a standard brokerage account, vs contributing to a 401k at all? You loose many years of company match, but I wonder if that would be more or less, than the penalty you would have to pay to get at the money early?

Optimally, it would be contribute the minimum to get 401K match, plus put $$ away into Roth 401k if available and a plain roth, then overflow to regular accounts.

[cat4ever]

To me, the simplest way to avoid the penalty would be to roll it all over into a traditional IRA. In that case there would be no penalty or taxes owed. Of course if you want to use the money after the roll over you will pay taxes and penalty on what you withdraw until you're 59 1/2, but at least you're not paying it on the whole thing at once. I'm not sure that point was made clearly.

As for the rule of 55, I don't think it holds if you retire before the year you turn 55, even if you leave everything in the 401K after retirement.

[armor99]

Quote:

Originally Posted by SSMRI74 Ok thanks, I figured as much. I’m soon to be 47 years old and think of going part time or retirement earlier than 60. I was wonder if there is any way around the early withdrawal penalty Thanks for the response

I have researched this a lot. I have not really found a way to do so with a 401k, if you are younger than 55. Once 55 the rule of 55 applies.
Now if you had a Roth 401k, you could roll it over to a ROTH IRA, and as long as that ROTH IRA has been in existence for more than 5 years, you could immediately withdraw all of your personal contributions out of it with no taxes or penalties at all. Also understand that when you do a ROTH 401k rollover to a ROTH IRA, none of the employer matched money goes into the ROTH IRA. That will always be moved into a traditional IRA account…

[RxMan]

I’m 47 years old as well. My first move upon changing jobs a couple of years ago and gaining access to a Roth 401k option for the first time was to put a little more than half of my total 401k contributions into the Roth 401k option. I have an existing Roth IRA that is over ten years old now that I can use to rollover this Roth 401k portion of my account.

I’ve verified that my plan allows for the Rule of 55 option. What I need to verify now is if they allow for partial distributions.

My next step is to figure out how to fund the years until I have access to my retirement accounts without penalty. I’m wondering about boosting my taxable account just for that reason.

I’m also trying to figure out how many more years I want to work. If I leave before age 55 I have to fund myself until age 59.5 before having access to my 401k without penalty. Once I hit that age then things will be less complicated.

I’m also wondering about how much my health insurance will cost once I retire but before Medicare starts. I have to factor those costs into my planning.

And what if I’m financially independent and ready to go at say 53 or 54 years old? Do I wait until 55 to take advantage of the Rule of 55 or figure out a way to make it work and leave at a younger age? I don’t have all the answers yet but I’m at least thinking about these various scenarios.