IRA Question 72t

L1: IRA Question 72tI have a question here for the experts. I have a simple IRA with only about $43,000 in it. I am 57 (Will be 58 in Oct) years old and a working retiree meaning I am getting both a pension check (separate from the IRA) and also a paycheck. I am going to be laid off on July 1 so my paycheck will come to a screeching halt and my income will take a decided hit. I can live off of my pension checks but I need to pay off a couple of loans in order to do it. My question is should I take a $5,500 – $7,000 lump sum from my IRA and take the penalty or should I do a 72t and receive monthly payments and just keep paying these bills. My feeling was that since my income would dramatically reduce then I could absorb the penalty at tax time. Is that a critical error in my thought process? I am totally confused as to which way to go. If so, how do I complete the 72t paperwork my broker sent me. He advised that they will not assist me on this.
Let me add that when I initially retired from the State Gov’t that they had a plan where I could continue working at my same salary in my same job and the retirement services would hold my retirement checks in an account (with no interest). Since I was younger than 55 at that time I rolled it over when I quit into the IRA. I left this program 3 years ago but continued working as my son was going to school and needed help. My retirement check at that time paid for technical school tuition. (He has since finished).
Thank you for any advice you can give me!2012-05-20 13:56, By: Lynn, IP: [98.71.11.34]

L2: IRA Question 72tLynn, If you only need about $7K from your IRA to pay off the loans, the tax (at a ballpark of 15% rate-but you know that better) and the penalty at 10%, would cost your about 25% of what you withdraw. The penalty, in your exampleis only about $700 for that amount. The trick is to figure out how much of that withdrawal will be lost (by yr end) to these taxes & penalties, so you “gross it up” enough to take out an amount that will cover your loans & the taxes and penalties. I would not start a 5 year withdrawal plan based on avoiding that penalty,and you can then have penalty free withdrawals (in under 2 years) after 59 1/2. If it is tied up in 5 yr SEPP plan, you cannot take any more out of that IRA for an emergency without “busting” the SEPP plan (and incurring more penalties) until you are almost 63. KEN2012-05-20 17:51, By: Ken, IP: [24.63.124.114]

L3: IRA Question 72tLynn…
I agree with Ken, don’t start a SEPP plan.
However, instead of withdrawing (and paying the penalty on) $7k, only take enough to meet the current payment schedule. Then after you are 59.5, you can adjustyour options. 2012-05-20 18:42, By: Gfw, IP: [205.178.73.77]

L4: IRA Question 72tThanks for the advice. Can you explain what you mean by adjusting my options at 59.5 if I do not do an SEPP?2012-05-21 01:06, By: Lynn, IP: [98.71.11.34]

L5: IRA Question 72tSimply that if you don’t adopt a SEPP, at age 59.5 you can pretty much do what you want without the penalty. Make monthly payments until that time and then pay off the loan. It is better than being tied up for the next 5 years.2012-05-21 01:37, By: Gfw, IP: [205.178.73.77]

L6: IRA Question 72tI agree with gfw, and the others.
They are suggesting that you do not pay off the loans until you are 59 1/2, at which time there would be no penalty. Until then just use IRA distributions to make your monthly loan payments.
You would look at your tax situation when you reach 59 1/2 in March 2014 to see if you should pay off all of the loan balance at that time with IRA distributions, or pay off part in 2014 and the balance in 2015. Your tax preparer can tell you where the tax bracket changes from 15% to 25% for you to make this decision.2012-05-21 05:24, By: dlzallestaxes, IP: [71.175.95.64]

L7: IRA Question 72tOk.. I am lost for sure. How can I receive distributions from my IRA if I am not 59 1/2 if I do not do a SEPP and not have penalties assessed to me?2012-05-21 11:31, By: Lynn, IP: [69.174.87.36]

L8: IRA Question 72tYou can’t – you will pay the penalties for any withdrawals prior to age 59.5.
What we are sugesting is that you minimize any withdrawals until age 59.5.2012-05-21 11:56, By: Gfw, IP: [205.178.73.77]

L9: IRA Question 72tLynn:
From a financialplanning view point you want to evaluatefour questions / scenarios:
1. What is thecurrent “effective tax rate” on your present income without making a “penalty IRA distribution”and,
2. What willthe “effective tax rate” be on your present income plus making the “penalty IRA distribution” to pay off all of your outstanding debt, which you indicated is about $7k?
3. What is the difference in real dollars for each of the above two scenarios?
4. What isthe interest rate on your outstanding debt and how much interest, in real dollars, will you pay if you continue to make payments until your age 59.5 as compared to paying off all outstanding debt now?
While your income may put you in a certain “tax bracket” like 15% or 25%,I suspect that your “effective tax rate” is lower and possibly quite a bit lower.If you need help with this evaluation I recommend you find a competent financial planner in your local areawho fully understands tax planning. He / she can help you with managing the IRA assets also if you need help with this aspect of your situation.
Good luck.
Jim F
PS: For clarification, you may withdraw any amount at any time from your IRA and you will pay tax at the “ordinary income tax rate.” If you are under 59.5 you must also pay a 10% penalty tax on the “gross amount” of the withdrawal. The reason you probably shouldn’t consider a SEPP Plan is the fact the real dollars of the penalty will not be significant for the amount you will need for the one-time withdrawal to pay off some or all of the $7k debt.2012-05-21 14:39, By: Jim F, IP: [70.167.81.119]

L10: IRA Question 72tLynn :
You are lost because you are not “listening” to what is being “said”.
No one is saying that there is no penalty before 59 1/2. We are all saying that tying up your IRA for 5 years until you are 62 1/2 does not make sense to us. We think that you should consider the cost of continuing the loan payments and interest for 2 years plus the cost of the 10% penalty on those withdrawals, vs the $ 700 10% penalty on the $ 7,000 withdrawal to pay the loan of now.
You may need a financial planner or accountant to make these calculations. As stated by everyone, you should also consider your tax bracket for 2012, 2013, 2014, and 2015. If they will all be the same, then waiting until 2014 to pay off the balance of the loan then will save you the 10% penalty on the distribution to pay that balance. If you are looking for “peace of mind” by paying off that loan now, then do it. The $ 700 penalty will be offset by the interest that you save by not paying it on the loan over the next few years. It may be a wash once someone does the calculations.2012-05-21 18:03, By: dlzallestaxes, IP: [71.175.95.64]

L11: IRA Question 72tThanks everyone for all of this advice. I will think about it and try to do the right thing. You have all helped me tremendously!2012-05-21 23:33, By: Lynn, IP: [98.71.11.34]