Early 401(k) withdrawals

[laurence]

O.K., so using FIRECalc, it looks like I have a shot at my ER goals. But when I look into the 72(t) rule, it looks like it won't let me withdraw through "equally distributed disbursements" as much as FIRECalc says I could safely. Could someone explain how 72t works and what the best withrawal method to use is? I don't even know if I'm using the terms right. I have this panic thought that I'll have this huge nest egg, and the government won't let me touch more than a few bucks a year, and I'll be eating cat food as a paper millionaire!

 

[intercst]

O.K., so using FIRECalc, it looks like I have  a shot at my ER goals.  But when I look into the 72(t) rule, it looks like it won't let me withdraw through "equally distributed disbursements" as much as FIRECalc says I could safely.  Could someone explain how 72t works and what the best withrawal method to use is?  I don't even know if I'm using the terms right. I have this panic thought that I'll have this huge nest egg, and the government won't let me touch more than a few bucks a year, and I'll be eating cat food as a paper millionaire!

This should tell you everything you need to know.

http://www.retireearlyhomepage.com/wdraw59.html

At today's interest rates using the amortization method, a 50-year-old could take a $5,806 SEPP distribution from a $100,000 account in the first year -- much more than the 4% most people consider safe.

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[renferme]

You didn't say how old you are. If you're 55 or older, but less than 59.5, you can make withdrawals without penalty.
And, you can set the amount as you see fit.
Here's a web site that allows you to see what the 72t calculations are ( there are 3 ways to do the calc., and you determine which one you like ).

http://www.finance.cch.com/sohoApplets/Retire72T.asp

Or , use google and search on " 72t ", for other calculators.

 

[laurence]

Well, I'm 30 now, but my dream is to retire at 45....thanks for the info!

 

[renferme]

If you retire at 45 and do a 72t, you'll have to withdraw until you're 59.5. That's a long time. You better be careful if you do, because if you run out of money before age 59.5, you'll have to pay the 10% penalty on everything you've received out of the 401k.
Best save outside of the 401k and use that money after you retire. Of course, that doesn't mean that you shouldn't max. out the 401k also.

 

[laurence]

I hadn't heard that. So if the government mandated withdrawal amount ends up being the wrong amount to withdraw, then I get punished with a 10% penalty on all withdrawals? Or are you saying that if I have to withdraw more at some point, I get hit then? In theory, I should have 1.5 mil at that point ( I know, past market performance is no indicator of future returns, but that's without being too ambitious). The 45 number is obviously not hard and fast, we have target income streams etc. But yes, I hope to save enough after tax to put off touching the 401k for at least a couple of years, giving the double benefit of increased growth and less payout time.

 

[renferme]

Here's a good explanation:
" Typically when you take withdrawals out of an IRA or retirement plan before you reach the age of 59-1/2, you have to pay a 10 percent tax penalty. However, this 10 percent penalty can be avoided by taking "substantially equal withdrawals" from your retirement assets. Under code section 72t individuals can avoid the penalty by taking distributions from retirement plans over a minimum of 5 years, or until you reach age 59-1/2. So if you began 72t distributions at age 48, you would need to continue the distributions until age 59-1/2.

There are three methods that can be used for a single individual when calculating the amount of annual distributions: minimum distribution, amortization, or annuitization.

Based on a retirement assets of $100,000 and your age of 48, your annual distributions for the next three years, starting in 2000, would be as follows. Minimum distribution method: $2,865, $3,085, $3,322 (assumes 8 percent growth and uses life expectancy table); Amortization method: $7,729 every year to age 59-1/2; Annuitization method: $8,050 every year to age 59-1/2. It is also possible for you to take 72t distributions on only a portion of your retirement assets. The portion of your retirement assets not included for 72t distributions would then be available to you for sporadic distributions should an unforeseen need arise.

Carefully consider your options before you get started, as you must stay with the same method once distributions begin. If for some reason you halt your 72t distributions in the future, penalties plus interest could result. "

 

[intercst]

If you retire at 45 and do a 72t,  you'll have to withdraw until you're 59.5.    That's a long time.   You better be careful if you do, because if you run out of money before age 59.5, you'll have to pay the 10% penalty on everything you've received out of the 401k.
Best save outside of the 401k and use that money after you retire.   Of course, that doesn't mean that you shouldn't max. out the 401k also.

Actually that's no longer true. IRS Revenue Ruling 2002-62 provides relief on the 10% penalty if your IRA/401k runs out of money before you reach age 59.5.

I retired in 1994 at age 38 and have been making 72(t) SEPP distributions since 1996. Even though I had enough money in my taxable account to make it to age 59.5, I decided to start whittling down my IRA balance because of the likely very large RMD at age 70.5. See link:

http://www.retireearlyhomepage.com/irawithd.html

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[bongo2]

I can see why you would have wanted to do this in 1996 (and now you can't change), but today wouldn't it make more sense to do periodic Roth conversions?