Is a 72T Right For Me?

L1: Is a 72T Right For Me?I have received conflicting opinions about the 72T option and I need additional advice. I am in my mid 40s andhave an IRA and 401k. I do not have a Roth IRA or other tax free investments. I have been told that tax rates are at historically low levels and a 72T would allow me to withdrawl a portion of my IRA money now and lock in those rates.I would then be able to put that money into tax free investments to tap during retirement.At this point I do not have the additional income to put into tax free investments, so does it make sense for me to set up a 72T to take advantage of the low tax rates?2006-09-08 12:16, By: 72TNewbie, IP: [204.253.137.213]
L2: Is a 72T Right For Me?It sounds to me that you may be talking to someone who doesn”t have your best interest on top oftheir list. I might also guess that these tax-free investments being pushed might also render that individual a nice sized commission. Is this tax-free investment by any chance a life insurance policy?
In my opinion, it would be silly to pull funds from an IRA, pay taxes and then reinvest remainder. Immediately you would be giving up the tax-deferred growth on the amount that you would be paying in taxes when you take funds from your IRA. Tax brackets may be low, they may go higher and then again they may go lower.
Best advice… get additional advice from your accountant (or someone other than the person that give you this advice)before you do anything!

2006-09-08 12:27, By: Gfw, IP: [172.16.1.73]

L3: Is a 72T Right For Me?Gfw – You are correct that the person with the 72T idea does sell whole life insurance as one of his financial products. Your reply and the others have been very helpful. Thanks!2006-09-12 11:12, By: 72TNewbie, IP: [161.107.18.136]

L3: Is a 72T Right For Me?Let”s see if I have this right, given your new information.
Take 72(t) distributions, pay tax at your increased marginal tax rate (current income plusSEPP distribution = higher taxable income), buy a whole life insurance policy, then take “tax-free” distributions (which are really policy loans against the cash values, which incur interest against the policy loans) when you retire. Is that the pitch?
Run VERY FAST!!
Jim2006-09-12 13:40, By: Jim, IP: [70.184.2.72]

L2: Is a 72T Right For Me?I fully agree. I suggest you look into your 401k plan to see if a Roth 401k is offered or will be next year. If so, you can make your contribution between the pre tax and Roth accounts in any combination you wish. If your plan does not offer the Roth 401k, then you can convert some dollars to a Roth IRA each year. If you cannot convert now due to the 100,000 MAGI income limit, then you will be able to do so beginning in 2010, when the income limit will no longer apply.
A Roth IRA or 401k can be invested in growth oriented issues or interest bearing offerings that do not have a reduced yield that is typical of tax free investments such as muni bonds. And you do not forfeit investment returns by purchasing a high commission product. A RothIRA has extreme flexibility including access to your contributions tax and penalty free at anytime, no RMDs, and tax free earnings in retirement. That is probably your best bet to hedge against rising tax rates in the future, as well as reducing the RMDs from your traditional IRA accounts or 401k rollovers.
A 15 year 72t plan is very inflexible and is twice as likely to not match your needs due to changing circumstances as a shorter more typical term half that long. But by the time the plan no longer matches, you have accumulated several years of penalty waivers that would be due if you had to bust the plan.
2006-09-08 20:06, By: Alan S., IP: [24.116.68.91]

L2: Is a 72T Right For Me?Hello Newbie:
I”m an advisor and my advice is to RUN from the guy / gal trying to sell you this “snake oil” of a concept. Exactly what investment is being offered to you? If it”s tax-free muni bonds, this will never work for you due to the low yield compared to what you will need in the future. If it is, as GFW suggested, a cash-valueinsurance policy or annuity like a fixed or EIA, this is probably not appropriate for you. Your third sentence really bothers me:
I have been told that tax rates are at historically low levels and a 72T would allow me to withdrawl a portion of my IRA money now and lock in those rates.
While it”s true that tax rates are currently low, there”s no way to “lock in those rates” as you were told. Were you told something like the following; “Thetax rate associated with themoney you take out under 72(t) will always be the tax rate on that lot of money?” If so, that is just flat wrong! If your annual income today is say $100,000, then whatever money you take out under 72(t) simply adds to your current income to determine your taxable income. If you take $50,000 per year out under 72(t), then your taxable income will be $150,000, which will be at a higher tax rate than if you didn”t have 72(t) distributions. So please don”t fall for this false statement you have been told.
Here”s a fact you can count on. Tax deferred growth works. A $100,000 initial investment compounded at 8% annually over 30 years will grow to $1,006,266 with taxes deferred. Assuming a 33% ordinary income tax rate, if you cashed in the account and paid the taxes (nobody in their right mind will do this), you will have $707,198. But the same $100,000 invested in a non-tax deferred investment and taxes at the rate of 33% are paid on the annual growth, will only produce a $478,931 pile of money at the end of the same 30 year period. Tax deferral works to the tune of an extra $228,267 in this example.
Hope this helps you in your decision process.
Jim2006-09-11 09:43, By: Jim, IP: [70.184.2.72]