L1: 72tIfI amturning 55 anytime duringyear 2011 and separated from work at age 54 or later, can I withdraw from my Rollover IRA (funds from pension plan and 401K) without the 10% early withdrawal penalty beginning on January 1, 2011? If yes, I do not need to set up a 72t as long as I find a broker that permits partial withdrawl from my rollover IRA? Are all those correct?What if I decided to work again before I reach the age of 59 1/2?2010-06-29 20:05, By: wyzzy, IP: [220.127.116.11]
L2: 72tShort answer… NO!
From our 72(t) FAQ
Q. What is the Age 55 Exception to the 10% penalty? A. The age 55exception only applies to distributions made from qualified employee rertirement or annuity plans – it does not apply to an IRA. Distributions made to you after you separated from service with your employer, if the separation occurred after you reached age 55, are not subjectto the10% penalty tax. For the definition of age 55, IRC Notice 87-13 states… “such separation from service occurred during or after the calendar year in which the employee attained age 55.”
You may want to spend a little time reading some of the information on this site.
2010-06-29 20:14, By: Gfw, IP: [18.104.22.168]
L2: 72tThose provisions can be illustrated by an example. Suppose you turn 55 in June, 2011 but separate in March at age 54. You will still qualify for the penalty waiver because you separated IN the year you turn 55 or later even though you did not reach 55 by the separation date.However, the penalty is only waived for distributions directly from the plan of the employer you separated from and only for distributions taken after the separation. If the plan allowed you to take an in service distribution in January, 2011 while you were still employed, the penalty would apply because that distribution was taken prior to separation from service.Now lets say that you rolled over the plan to an IRA instead, but decide to return to work rather than start a 72t plan. If your new employer will accept an IRA rollover, you could roll your TIRA into the new employer plan. Then if you separate again in 2012 at age 56, you still qualify for the penalty waiver because the funds are now in the new employer plan and you separated from the new plan at age 55 or later.Many of the exceptions in Sec 72t apply to either IRAs or employer plans and some apply to both. As you can see, there are plenty of planning opportunities to be researched.2010-06-29 20:56, By: Alan S., IP: [22.214.171.124]
L3: 72tI think I forgot to answer the addition above, so this could be a duplicate.So I understand the following are true:1. I have to be age 55 or turn 55 in the year I separate from work.2. If I have met the number 1 condition above, I can make partial cash distributions (in my pocket) from my 401k and lump sum pension paymentbefore Iroll over the balances to an IRA without incurring the 10% penalty.Now that the balances of my retirement money is in a roll-over ira, can I withdraw from this ira before I reach age 59 1/2 without incurring the 10% penalty or do I have to set up a 72t? Common sense tells me I have to set-up a 72t, but who knows what the IRS is thinking?Also, what happensin the futureif I decide to go back to work? Is there a time requirement when I can go back to workand/or get penalized monetarily?2010-06-29 21:47, By: wyzzy, IP: [126.96.36.199]
L4: 72tDistributions from IRAs before 59 1/2 are subject to the 10% penalty, UNLESS they qualify under the SEPP 72-T or other exceptions.Once you start a SEPP 72-T plan, you must continue taking distributions for the later of 5 years or age 59 1/2.2010-06-29 21:56, By: dlzallestaxes, IP: [188.8.131.52]
L5: 72tWish to thank everyone forthe input.I think I understand this now, not totally, but getting there.I will also buy that book, mentioned here, if I ever decide to retire early.Wish everyone the best.wyzzy2010-06-29 22:45, By: wyzzy, IP: [184.108.40.206]
L6: 72tTo expand somewhat on your situation – the penalty free distributions from your 401k after you separate at 55 are only helpful if your plan lets you take out flexible distributions periodically or when you need them. If the plan only allows a lump sum distribution, you would have to take out enough to last you until 59.5 to avoid penalty, and that large an amount in a single year would probably raise your tax bracket enough so that the added cost would offset the penalty waiver. In that case, you would probably just do the IRA rollover and start the 72t plan. So you need to check with your plan administrator to see how flexible the distribution options are after you leave.Now suppose you have to start the 72t plan, but then find another job. As posted earlier, you still have to complete the 72t plan, but you are allowed a one time switch to the MD method which will usually reduce your required payout by 40% in very rough numbers. But that will help preserve your IRA assets and stop the combination of salary plus 72t from inflating your tax bracket as much as it would have without the one time switch. Of course, you must be sure your new job is secure before making that one time switch to the MD method.2010-06-29 23:27, By: Alan S., IP: [220.127.116.11]
L7: 72tDollar amounts are samples only:Maybe separating from employmentat age 55in 2011 after birthday.401K balance = $175K(also will have loan balance of $30k after retirement, original amount 50k)After retirementwill withdraw total401K balance to pay off debts and pocket the rest. (No 10% penalty here right). What do I do with the loan balance of 30k? Do I have to pay 10% penalty based on original amount of 50k? How do I avoid paying 10% penalty on the loan original amount or loan balance or both?Total Lump sum pensionamount will be rolled over to an IRA and SEPP (72t) it out.Happy 4th of July to everyone.2010-07-01 23:30, By: wyzzy, IP: [18.104.22.168]
L8: 72tRemember that you can separate prior to your birthday and still qualify for the exception as long as it is IN the year you turn 55.Your plan would probably report the loan balance as an offset distribution meaning that only 145k will be available for you to roll over or apply to debt. The 145k will be exempt from the penalty.But I doubt thatyou can avoid the penalty on the 30k loan distribution because the loanproceeds weretaken out prior to separation. You would probably need other exceptions (such as high medical expenses)in Sec 72t of the code to except part of the 30k. The penalty would apply to the 30k, not the original loan amount.Note that an offset loan distribution can actually be rolled over, unlike a deemed distribution. So if you had other funds to replace the 30k and complete a rollover, you would eliminate that penalty. Perhaps you could roll over some of that amount andthen generatea larger SEPP distribution to replace the funds you supplied to complete or partially complete the rollover. That larger SEPP distribution could come from taking out a full year in your first SEPP year regardless of the month you start the plan. You would also have an extra 30k in your IRA that would generate a higher SEPP calculation.There are alot of moving parts here. You could post further questions or take these ideas to a professional retirement and SEPP planner to turn them into a workable plan.2010-07-02 00:58, By: Alan S., IP: [22.214.171.124]
L9: 72tAn important question not yet asked :Is there any “employer stock (NUA)” in your 401-K or PENSION PLAN ? If so, get the “cost basis” of this NUA ( Net Unrealized Appreciation employer stock). If it has appreciated significantly over the years, you may save thousandsin taxes because of this special provision of the federal tax code.Search this website for applicable postings and threads related to NUA. Also, check www.irs.gov, or J K LASSER YOUR INCOME TAX which has an excellent, understandable discussion of this provision andits nuances.2010-07-02 02:51, By: dlzallestaxes, IP: [126.96.36.199]
>(also will have loan balance of $30k after retirement, original amount 50k)
Although employer plans vary considerably, it is common for any outstanding loan to become due and payable on the date of separation from employment. The reason for this is that loans are usually repaid via deductions from your salary… and that ends on the date of separation. I would check with your company HR department or person to see what your particular plan requires before assuming that you will have a “loan balance” in retirement.
2010-07-04 02:55, By: Ed_B, IP: [188.8.131.52]
L9: 72tCorrect. There will definitely not be a loan balance carried into retirement, other than possibly an option to pay off the loan within 60 days or other short term period. But any rollover request will trigger an “offset distribution” of the loan, meaning that the balance available for rollover will be reduced by the outstanding loan balance.This is the expected treatment, but of course the plan administrator should be consulted if they don’t make all the options clear and in writing.2010-07-04 03:40, By: Alan S., IP: [184.108.40.206]
L10: 72tMore important than the nuances of 401-K and SEPP 72-T is your doing some budgeting, financial, and cash flow planning ( and needs analysis). Further, you should consider the tax affect of adding any taxable distributions to your known taxable income from wages, etc. prior to your “retirement”. It would be good planning to try to keep your total taxable income under the 25% tax bracket. If your 2010 wages are moderate, then a partial 401-K distribution in 2010 might be good planning. Then start your SEPP 72-T in January or early 2011 where the annual total will not be added on top of otherr salary.If your company does not allow partial or flexible distributions, then you would probably be better off with a prorata SEPP 72-T in 2010, if you retire this year. Wait to take any significant payment from the 401-K until you have limited other income, and thereby save taxes.As stated earlier, once you start a SEPP 72-T, you must continue it to the later of 59 1/2 or 5 years. In your case that will be 5 years. Hiring a professional to help you with the various alternative plans will be the best investment you can make.2010-07-18 02:37, By: dlzallestaxes, IP: [220.127.116.11]