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Looking to switch to part-time, wondering if 72t is an option.
Hello - great website!
I'm trying to determine if I can leave my job at the end of the year, or if I need to stick it out a few more years. Plan B is Rule of 55.
I intend to work part time for a few years to bridge the gap to 59 1/2.
Date of Birth: 11/06/1970
Single/Married Single, 2 kids 16 years old.
Annual cash needed year 1 (after taxes): 50K
Annual cash needed later years (after taxes): 50K
How are you planning on paying taxes? (withholding or quarterly estimates): quarterly
72t Calculation Method: Amortization
72t Distribution Start Date: 1/1/2023
*Life Table Used: (Life Expectancy: 34.3 using "52" in 2022 Single Life Table)
Stub Year (Y/N): N
Annual Recalc (Y/N): N
*Interest Rate: 2.09
*72t Account Balance(s) with account type (traditional IRA, Roth, SEP-IRA, SIMPLE-IRA, 401k, 403b, etc.): 401K - $800K
Describe other assets if applicable (taxable, Roth, other income, etc.) and how much is in each account.
Cash - 100K
Roth - 50K
HSA - 30K
Home Equity - 250K
Projected Part-time job - 25K/year
Current Salary - 150K
The 72tnet.com SEPP Distribution Calculator came up with $32,906.86 for Amortization method.
If my part time job has 401K, can I contribute without upsetting my SEPP?
If I end up with surplus funds, what is the best thing to do with them? Can I put in an IRA?
Thanks so much!
I suggest that you meet with an experienced tax, retirement, and/or financial advisor to work with you in developing a spreadsheet analysis to develop multiple options. This is an extensive engagement which I think is beyond the scope of the nature of this website.
In general, as a consultant, I would suggest that it may be more appropriate for you to consider the special tax provisions that in 34 months will give you complete flexibility starting in Jan 2025 (i.e. 2 months after you become age 54) to withdraw whatever amount that you want or need in any calendar year, rather than locking yourself into a SEPP 72-T plan for over 8 years until you will be 59 1/2 in May, 2030. In addition, I suggest that ask your HR department about the Cost Basis of your 401-K plan in reference to the special tax provisions for NUA ("Net Unrealized Appreciation" of employer stock). If this applies, you can save thousands of dollars in taxes, as well as giving you unlimited flexibility.
I am not sure where you get the interest rate of 2.09%. The new IRS tables and related regulations have changed the interest rate for new SEPP 72-T plans to 5% for all NEW plans. Accordingly, you can use our "reverse calculator" to determine how much would be needed to be placed in your SEPP 72-T plan from your 401-K if you decide that is the approach that you want to pursue.
In answer to your other questions:
Yes, you can make contributions to your 401-K and/or an IRA based upon having wages while you are taking distributions from your SEPP 72-T.
I suggest that you consider that you will be in the 12% federal income tax bracket if your GROSS TAXABLE INCOME is under $ 75,000, which would mean that your taxable income would be $ 56,000 after the Standard Deduction of $ 19,000 filing as a Head of Household. In addition, you will be eligible for Child Tax Credits, and the Education Tax Credits (when they go to college). As a result, you might not have any federal income taxes to pay, and you should take that into consideration when you calculate your Cash needs. If you are in the 12% tax bracket, I would not recommend any contributions to a 401-K or an IRA to "save taxes", but you could make contributions to your ROTH IRA.
As I said before, this is an extensive project with numerous options and factors to be considered. In situations like yours, I have rarely recommended that clients utilize the SEPP 72-T plan approach, despite being a long-time contributor to this website and its predecessor.
Thanks so much!
For interest rate, the calculator page says, Per IRS Notice 2022-6, SEPP plans starting in February 2022 and later can use the maximum of 5% or the 120% Federal Mid-Term Rate.
So I used the 120% rate found here - https://www.imagisoft.com/equal/federalmidtermrates.html
You missed the following wording above the chart. I think we should put this in bold caps so people don't miss it. (Sorry for the confusion.) "January 2022 saw new guidance from the IRS in the form of Notice 2022-6, which superseded Notice 2002-62. The new guidance says for SEPP Plans starting in 2022 and beyond, you can use “any interest rate that is not more than the greater of (i) 5% or (ii) 120% of the federal mid-term rate."
Nowhere do I see "February 2022" there, or in the other narrative about the new tables. Everywhere it says the new tables and rules start 1/1/2022.
Also, the age to use is the age you will be at the end of the year that you will start the plan. Therefore, you should use the factor for age 53, not 52, which would be 33.4.
You were right. It is the age when the first distribution is made. I was confusing it with the RMD rules.
The February 2022 date came directly from the calculator page. It's definitely confusing.
SEPP Distribution Calculator – 72tNET
Anyway, I have enough "big picture" information to move forward at this point.
What I really hope to do is find a part-time job that will allow me to rollover my current 401K and take advantage of the "Rule of 55" provisions you alluded to.
NO. DO NOT ROLLOVER YOUR 401-K TO AN IRA. THE RULE OF 55 (AND NUA) APPLY ONLY TO 401-K PLANS. IT DOES NOT APPLY TO IRAs !!!!!!
If you roll over your 401-K to an IRA, then you are subject to the 10% penalty for Early Distributions before age 59 1/2.
P.S. Thank you for pointing it out where we have misinformation. We will correct it ASAP.
Some companies will allow you to keep your 401-K with them even after you leave the company.
Not all companies allow 401_K rollovers into their plans.
More importantly, have you checked with your HR department re NUA ?
It's really tough finding anyone in our HR dept that understands the finer details of our 401k plan.
I'm not familiar with NUA - All my 401K is held at Fidelity in S&P and Bond Index funds. There is no company stock involved.
Would I need to hold company stock for NUA to be relevant?
I understand. Many companies have the same problem of HR not understanding the 401-K plans. They should be forwarding queries to the 401-K administrator.
In your case it would not matter because NUA applies ONLY to company stock owned in a 401-K plan. NUA is applicable only when there has been a significant increase in the value of company stock within a 401-K plan. This is often the case when the company buys company stock (or contributes it) with their matching contributions, or if the employee directs that their own contributions be used to buy company stock. Since your situation does not apply to NUA, I won't repeat prior postings about the benefits to employees who are eligible because they have been employed for a number of years.
I think we have solved that NUA is not applicable in your circumstance. So, the real issue is the ability to commence unstructured distributions from your §401(k) plan. In general this is beneficial if you qualify. There are three fundamental rules:
1. The assets must remain in the the §401(k) plan; they may not be rolled over to an IRA.
2. You must separate from service from your employer and that separation must occur in the year in which you attain age 55 or older; you may actually be under age 55 on date of termination but must be 55 by 12/31.
3. The above 2 are tax rules; but the most important rule has to do with the plan your in. For this you have a document (or had) called an SPD --- Summary Plan Description. The SPD is required by law & nowadays is usually available somewhere online --- contact HR is you can not find your copy. SPDs are normally 10 - 25 pages and are intended to be a plain English version of plan issues. Go to the page for distributions. You will generally find one of three answers:
a. Unlimited withdrawals are permitted usually by written request. (Good answer).
b. Only once a quarter or once a year withdrawals are permitted. (Not as good as (a) but still doable).
c. Only QLSDs are permitted --- Qualifying Lump Sum Distributions (No good...scrap this idea and return to SEPP programs).
The choice of a, b or c above was a plan sponsor decision (your employer) made usually when the plan was first adopted and was also generally made as a "cost of servicing" issue; e.g. can you envision a plan with 1000's of terminated plan participants all of which have the ability to request unlimited withdrawals ---- starts to look like a bank and the need to hire a couple of full time tellers. I am not defending employers, far from it. I am simply suggesting how certain plan features were adopted eons ago when the plan first started.
The language in my SPD looks like this. So it sounds like I can take monthly payments until I reach 59.5 and could then take a lump sum and roll it into an IRA -
You may elect to receive installments over a period of not more than your assumed life expectancy (or the
assumed life expectancies of you and your beneficiary). When you elect to receive installment payments
from the Plan, your election must specify:
- The frequency (monthly, quarterly, semi-annually or annually) of the installment payments; and
- The duration (number of payments to be made) or specified dollar amount of the installment
If you elected installment payments and are receiving payments, you may elect, by filing an election form in
accordance with rules adopted by the Committee, to receive a single lump sum payment of your account
balance in lieu of future installment payments.
It looks like you are "good to go" in accordance with "The Badger's" comprehensive e-mail.