L1: 72t NewbieThanks for the information provided by this site. It is by far the best location I have found for this information. I have just started to educate myself on 72t’s and I would like to check my understanding on the basics.
Background: My employer changed the rules of my pension so that lump sum payments will be based on PPA rates instead of GATT rates. They will phase the new PPA rate in over 4 years beginning in 2010. Last year it was 75% GATT/25% PPA, this year it is 50% GATT/50% PPA, and so on until it is 100% PPA. Naturally, this is not to my benefit. They project the loss to lump sum benefits for a 55 year old to be around 9%, but it could be as much as 17%. So I am considering early retirement to avoid those losses.
My birthday is in January, and I just reached 55 years old. My understanding of the 72t is that I could sever employment, and take this benefit (along with my 401k) as a Direct Rollover into a Traditional IRA. I could then set up two IRA’s, one as a 72t which would would generate monthly income in equal payments for the next 5 years, and the second one as an emergency fund to be used if my living expenses were to exceed my income under the 72t/SEPP IRA.
I have two questions at the moment. The second fund that I plan to set up for emergencies(the non 72t IRA); I read somewhere that I would have access to that money without the 10% penalty if I was 55 years or older. Is that true? Is it a one time/one situation access?
The second question is related to all the discussion in this forum about breaking the 72t and incurring the penalty taxes on distributions paid to date. This is obviously something to be avoided at all costs. If you set up a 72t, and go with a reputable investment firm, I would hope there would be no way for this to happen accidentally because of an incorrect distribution by the holder of this investment? I am thinking that if I break my 72t, I would hafve to do it with my full knowledge of the situation. Is that true?
Any advice or feedback is much appreciated. I am just finding my way.2011-02-01 14:05, By: bim, IP: [126.96.36.199]
L2: 72t NewbieQuestion #1… As long as the funds stay in the 401(k) and your ex-employer allows periodic withdrawals, you will no incur the 10% penalty if you have attained age 55 in the year that you terminate your employment. If you transfer the funds to an IRA, the age 55 exemption will be lost.
Question #2… Regardless of how the problem is created, it is your responsibility. An IRA is between theyou and the IRS. You may have possibilities of recovery if youdidn’t create the problem, but it is your problem.The best way to make sure that you don’t bust your plan is to monitor it yourself.
You may also find our Planning Pointers page helpful2011-02-01 14:17, By: Gfw, IP: [188.8.131.52]
L3: 72t NewbieThanks Gfw. Yes, the Pointers page is very helpful. Question#2… ok, I get it. That is probably why the Pointers page recommends getting your distribution on the 5th or 6th of month….I assume that is to allow enough time to corrrect it before the month ends?
Question#1..I am trying to find my 401k plan documents to see if that type of distribution is allowed. So, if I leave an amount equal to what I want to save for an emergencies in my 401k, that should work, and avoid penalties. I would need to transfer the rest to the 72t IRA to accommodate the income return. Is there any issue with transferring a portion out to an IRA? I guess that answer is in my 401k plan documents.2011-02-01 14:50, By: bim, IP: [184.108.40.206]
L4: 72t Newbie>>recommends getting your distribution on the 5th or 6th of monthYour assumption is correct.
Partial transfers from your 401(k) to an IRA shoudl create no problem.
2011-02-01 15:02, By: Gfw, IP: [220.127.116.11]
L5: 72t NewbieGot it. Thank you Gfw. I appreciate the very quick repsonses. Are you affiliated with any of the Website sponsors?2011-02-01 15:29, By: bim, IP: [18.104.22.168]
L5: 72t NewbieSort of… it is my website 2011-02-01 15:34, By: Gfw, IP: [22.214.171.124]
L6: 72t NewbieNice job on the website Gfw!! It is very helpful.
Another newbie question. In the following statement. what is meant by “PLR”? Profit Loss Ratio?
Don’t be part of a SEPP horror story – Establish a plan that will take advantage of past PLRs and almost guarantee that your SEPP will never go bust – yes it is possible, but it must be planned for in advance. 2011-02-01 16:53, By: bim, IP: [126.96.36.199]
L7: 72t NewbiePLR = Private Letter Ruling. Here is the Wikipedia definition… http://en.wikipedia.org/wiki/Private_letter_ruling
They are also expensive… about $9k plus professional fees.2011-02-01 16:57, By: Gfw, IP: [188.8.131.52]
L8: 72t Newbiebim,
I am not sure you grasped the point made by gfw thatsince your separation would be at age 55 or later, any distributions directly from the plan would be penalty free. That would eliminate the need for a 72t plan entirely IF the plan offered flexible and/or periodic distributions. So the first step is to check the plan document and also confirm your understanding with the plan what flexibility they offer.
This is important because if you had to take a lump sum for 5 years of expenses, it would inflate your marginal tax rate to the point where it might be more costly than the 10% penalty. The ideal situation would be if you could change the amount you take annually according to your needs and the income would be spread over the 5 years. Then at 59.5, you could do the IRA rollover.2011-02-01 20:19, By: Alan S., IP: [184.108.40.206]
L9: 72t NewbieIf I understand the original post correctly, he has a pension that he’s trying to get out of the hands of his employer (by retiring early) *and* he has a 401(k). Assuming that the 401(k) allows for multiple distributions over time and following this site’s recommendations, he would
1) Determine how big the IRA needs to be for a 72(t) plan to meet his projected needs for the next 5 years
2) If the pension distribution is larger than that amount, he would split the distribution into two IRAs, one for the 72(t) and one for future use.
3) If his needs grew before the 5-year limit following his first withdrawal he could either a) set up a new 72(t) plan from the 2nd IRA, b) withdraw money from the 2nd IRA using one of the other exceptions, e.g. medical expenses, c) withdraw a portion of the money from the 401(k), or d) rollover the 401(k) into one or more IRA’s and start a new 72(t) on a portion of that money.
Of the choices in 3), are any particularly better than any of the others? All of the options that set up a new 72(t) would require them to run for at least 5 years, correct?2011-02-01 22:10, By: knupug, IP: [220.127.116.11]
L10: 72t NewbieThanks for chiming in Alan S. & knupug! knupug is correct. I am trying to get my hands on the lump sum payment. My pension program allows either a monthly benefit for the rest of my life, or a lump sum benefit. I would take that lump sum benefit and combine it with an existing IRA, and my 401k account, to create the initial 72t. I need all three to meet my monthly budget requirements. I want to leave a portion of my total retirement out of the 72t for emergencies, and based on what has been said, I would think the best place to leave it is in the 401k, if the 401k plan doc allows routine penalty free distributions for those 55 and older.
I wish I had enough in the 401k alone to handle my monthy needs. I like your thought process Alan S.2011-02-02 01:50, By: bim, IP: [18.104.22.168]