72t regardless of after tax funds

L1: 72t regardless of after tax fundsHey folks,I”ve seen it suggested that a 72t should be implemented if you don”t have sufficient after tax moneys to otherwise meet your requirements till you are 59.5. I wonder about that advice and perhaps opinions here will bepurelyspeculativebut appreciated anyway.At the core, the issue is if folks retiring pre-55 should implement a 72t (post 55 draw from 401k as an alternative) as a rule for several reasons/trends:To thepositiveside of taking on a 72t regardless of AT assets:- likely increase in marginal tax rates.- retirement/IRA incomeeffecton SSI benefit taxation and medicare insurance rates.- Beneficial tax rates for AT account cap gains/dividends vs regular income rates for later IRA withdrawals.- tax smoothing in generalTo the negative:- foregoing sheltered gains in the IRA- potential loss of the capital gains/dividend tax rate benefit.Unknown/unlikely:- flat tax or sales tax and how IRA treatment will work. I like the concept but struggle with the hurt where you have already paid tax on your AT funds. Pay tax, save money and then pay tax again when you spend the AT money…. not very nice.- future tax ratesSurely not a complete list!A snapshot of the current tax environment leads me to conclude that folks should draw the 72t/401k sooner rather than later regardless of AT funds. Am I missing something?Please, opine away!Regards – Cisco2007-09-07 11:17, By: cisco, IP: [209.173.79.89]
L2: 72t regardless of after tax fundsIn a nutshell I think you are asking about the issue of initiating a 72t plan when you don”t really need the funds for current expenses, but rather want to draw down your TIRA assets for other strategic reasons.
There may indeed be several reasons, some but not all tax driven to do that. However, the answer to this need is typically not a 72t plan, but Roth measured Roth conversions. There are two situations where these conversions are complicated by other factors:
1) Your income is over the 100k MAGI limit, and you want to convert some money prior to 2010 when the income limits disppear.
2) Your conversion strategy is aggressive to the point where you actually need a 72t to supplement it to pay the taxes when you do not have sufficient taxable account funds available to cover the taxes.
In these two cases, you may want to consider a 72t after considering all the variables involved. You must make several assumptions about taxes in formulating the conversion strategy and/or extent of that strategy. Some of those assumptions should include:
1) Changes in your personal asset structure such as an inheritance
2) Future tax legislation including but not limited to the how many of the Bush tax cuts survive 2010, and where increases will hit if not across the board. For example, the cap gain max rate could survive at 5% for those in the 15% bracket or lower, but could rise about 15% for those in higher marginal brackets. That could result in closing the gap between ordinary income and cap gain rates for higher brackets. Also, changes in the estate tax rate including the accompanying carryover basis rules slated for 2010, AMT reform etc etc.
I would not best on the Fair tax ever passing, although a limited national sales tax could be implemented as a supplement to the income tax. Much of this is driven by deficits and politics, of course.

2007-09-09 20:32, By: Alan S., IP: [24.116.165.60]

L2: 72t regardless of after tax fundsIf you expect to be in a Taxable Federal Estate situation, then realize/consider that any federaland state income taxes you pay now will reduce your estate and save 45% on those income taxes accordingly.
Also, if you can, take as much IRA distributions between 59 1/2 and 70 1/2 that can be taxed at 15%. Further, if you can do a ROTH CONVERSION, then those income taxes will likewise save 45% on those taxes by reducing your estate.
Also between 59 1/2 and 70 1/2, if you can afford it, defer taking your Social Security benefits until after 70. You will increase your benefits from 70 for lifetime by 8% per year deferred, or 32% if you wait until 70.
As stated often, PLAN YOUR RETIREMENT !!!!!!!2007-09-10 12:53, By: dlzallestaxes, IP: [141.152.249.5]

L2: 72t regardless of after tax fundsThanks Alan/Diz for the comments!The Roth conversion preference to a 72t implementation certainly resonates. I have been looking at conversions starting in 2008 as another optimization option, however have not had the clarity ofsimply looking at a 72t draw as essentially the same as a Roth conversion with the advantage in my case of effectively shifting AT money into a Roth sheltered account. So, while I will pay regular income tax rates in either a 72t or Roth conversion scenario, the latter will provide for a zero tax on future withdrawals versusprimarily cap gains tax rate on the AT account. The complexity for me is managing my MAGI to a level that allows for Roth conversion as I have stock options which must be triggered within the next 5 years. And there is the 2010 option too. In any case, the 72t looks to be a follow-on option if for some reason I get into a bind but, for now, off the table for analysis.Diz, on the SSI deferal strategy, my check with the Fidelity”s retirement planning engine shows a lower ultimate estate values for a deferred SSI draw.I”ve seen SSI deferral recommended by many reputable financial advisors. An issue that I have another 15 years or so to study. I”ll need to upgrade my spreadsheet re IRA withdrawals between 59.5 and 70.5 to capture potential benefit for some variation. Again, some time tostudyand surely something to tweak annually post 59.5 till I get to RMD at 70.5.Again, thanks to both of you. I”ve followed the discussion here on 72t.net for a couple of years and much appreciate all of the quality, thought provoking advice you folks regularly provide.Regards – Cisco2007-09-12 12:15, By: cisco, IP: [209.173.79.89]