72t pension payout

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L1: 72t pension payoutI’m getting conflicting advice on this: I plan to take early retirement right after I turn 54 in March this year. I would take about $350k of 401k/tax sheltered annuity/employer supplemental retirement money and put it into a IRA and take the 72t option. I have a separate qualified pension plan worth about $116k. The employer says I can take that in 60 monthly equal payments (they don’tcall itan SEPP) without any IRS penalty. My question is: can I really take the pension payout and the 72t without incurring the IRS penalty for early withdrawal? My accountant says no because of the rules for calculating the 72t payout–he says this allows me only a total of $26k early withdrawal per year without penalty, while I will be taking out more than that when the pension payout is added. I’ve called the IRS 3 times and havegotten two yes’s and one no. Help!2006-01-23 11:51, By: V., IP: [162.119.240.102]
L2: 72t pension payoutHi V:
I think the answer to your 5-year pension payout lies with the controlling documents which your employer has. I don’t know all of the quirks associated with the different employer pension plans so that’s why you need to investigate the plan document to get the complete explanation.
One general rule that applies to 401(k) and most other employer plans deals with retiring on or after “attained age” 55. If you retire during the year that you turn 55, then withdrawals from this type plan is exempt from the 10% early withdrawal penalty. So if you could wait a year then you would not have to deal with this penalty.
However, when you process a rollover from the company plan(s) to an IRA, then you change to the rules governing IRA’s, and you must be age 59.5 to avoid the 10% penalty, unless you employ the rules of 72(t) or SEPP.
I’m not sure we have all on the pertinent information about your situation, but I think your accountantmay begiving incorrect advise. The money you take out of a SEPP Plan is a function of how much money comprises your SEPP Plan Universe. If you include the amount of your 5-year payout pension along with all of your IRA accounts as your SEPP Universe, then I think your accountant may be right. But if you segregate the pension from your SEPP Universe of IRA accounts, then I don’t see any reason you can’t take both. If the later then your accountant is wrong.
Hope this helps.
Jim2006-01-23 13:25, By: Jim, IP: [70.184.1.35]

L2: 72t pension payoutThanks, Jim. I’ll check with the employer about how they describe the pension plan. But how do I “segregate” the pension payout from the 72t, as you suggest?
V.2006-01-23 13:49, By: V., IP: [162.119.240.102]

L2: 72t pension payoutThat”s the easy part and it will be “by default” segregated.
Distributions from your 5-year payout pension will generate a 1099R each year.
Distributions from your SEPP Universe IRA will generate another 1099R each year. This is the “by default” segregation I referred to.
My suggestion is to figure out how much money you need from your SEPP and put that into one IRA. Then put the balance into a second IRA and hold this for emergencies. Yes, you have to pay taxes and the 10% penalty on any distributions from the emergency IRA, but that”s preferable to busting the entire SEPP.
Take all of the 1099R forms to your accountant and let him / her plug the information into their program. Of course if you do your own taxes using one of the tax preparation programs, it will force you to plug in the data from each 1099R into the right place. It will also help you when the 1099R is not coded for 72(t) exception and will get you to the proper form (never can remember the number) to avoid the 10% penalty.
Hope this helps.
Jim2006-01-23 15:20, By: Jim, IP: [70.184.1.35]

L2: 72t pension payoutI agree with Jim.
However, I am curious about the pension plan 5 year rollout. This almost sounds like a lump sum option but the plan has this 5 year rollout to prevent massive rollouts. In other words, it might be underfunded (what a surprise!) The only way they can pay this out annually without an early distribution penalty is to set it up as a SEPP and presumably code the 1099R with a “2′ reason. They also should provide you witha subsidized amountfor the lost investment period in a 5 year rollout instead of a lump sum. There might be some other motivations going on here also because of the pending pension legislation that will allow employers to use a higher interest rate figure which will reduce any lump sum. So ask them if your 5 year payout is guaranteed to be the same each year, if it is considered substantially equal and if they will code the 1099R with a 2. In a time of pension plan reductions, an employer strategy to reduce their payouts will spread like wildfire and fairness to employees will not be high on their agendas.
There is no reason you cannot have two SEPP universes going at the same time and in this case, that might be what you will have. One of them will be the pension and the other will be from your IRA. They can each be calculated separately,but you must always keep them separate from each other and from other non SEPP accounts. A risk of multiple SEPPs is confusion and doing rollovers and/or contributions that bust them. Document everything for yourself up front, noting the suggested form on this site.
Jim also makesa good point of working until the year you turn 55 which would be until next January if you can. If you opted to work until then (does not have to be till your birthday), you could then take distributions from the employer plans without the early distribution penalty. You might be able to put on the SEPPs or reduce the payout amounts you need to take. 2006-01-23 18:31, By: Alan S., IP: [24.116.165.157]

L2: 72t pension payoutGood morning V:
In case you haven’t figured it out yet, your mission is to find out exactly what the detailsare ofthis “5-year payout pension” thing that you have and report back. Looks like you have brought a new creature to the forum and I’m sure there are a lot of folks … besides Alan and me … who are anxiously waiting for the answer.
Thanks.
Jim2006-01-24 08:57, By: Jim, IP: [70.184.1.35]

L2: 72t pension payoutI placedseveral calls to my employer’s retirement centerand was told repeatedly that I would not incur a penalty by taking the 60 month payout of my pension, despite my age of 54. However, I persisted. I called back and asked specifically what the distribution code would be on my 1099R if I took the 60 month option. They’d never been asked that before…so it took a while to get the answer. Eventually they called me back and told me that I WOULD take a penalty with the 60 month pay out (as well as on the lump sum distribution) unless I could wait until the year in which I turn 55. Since my income from the 72t option on the other money would not be enough for me, I’ve decided to wait until January 2, 2007 to take retirement.
Thanks for the good suggestions and interest.
V.2006-01-25 07:29, By: V., IP: [162.119.240.102]

L2: 72t pension payoutCongratulations V. Now you’re getting the hang of this!
Your next question is, “Can I take a lump-sum and do an IRA Rollover?”
My guess is that you can do the rollover and this option should be spelled out in the “Distributions Package” they should give to you. If you don’t have a package, ask for one with your projected early retirement date this year. Of course you can delay retiring until 2007 or later if you desire. If you don’t use the package they send you, just ask for another one when you really are ready to retire. By doing the “IRA Rollover” with the “trustee-to-trustee” transfer method, there is NO mandatory 20% withholding requirement. After the rollover you can formulate a SEPP Plan Universe and start your 72(t).
I do, however, recommend getting some good investment / distribution planning advice before starting any 72(t) distributions.
Jim2006-01-25 08:26, By: Jim, IP: [70.184.1.35]

L2: 72t pension payoutGlad to see that you got some answers. Often it takes real persistance to get anything more than superficial information from HR/EB Depts. Their answer does make sense, and they may not have wanted to admit why they cannot offer a full lump sum now that you could roll over. Note that an employer plan could set up 72t payments and that would enable them to retain funds longer, but obviously paying it all in 5 years was not a 72t and therefore all subject to early withdrawal penalty.
Working another year on balance is probably wise, as it will help your net worth, probably your SS payments next decade, increase your pension, and give you time to figure out what to do about health insurance, which is usually a major expense. The only caveat is that if the pension bill allows them to use a higher interest rate to calculate future lump sums on the pension plan than they currently use, that could be a negative. I had to really press my former employer for their complete lump sum formula, and found they used the average of the 30 year bond for each quarter to calculate lump sums for the second quarter following. The 30 year rates are posted on the federal reserve website. I was then able to determine when to best order the lump sum knowing the interest rate trend. This saved me about 8,000. over just guessing. Good luck.2006-01-25 11:28, By: Alan S., IP: [24.116.165.157]

L2: 72t pension payoutI do havea few otherquestions, now that I think of it. I already know I could roll the approximately $115k pension lump into an IRA now (the HR people did tell me that) without IRS penalty. So I could conceivably take a 72t option on the pension lump and a 72t option on the remaining $350k. Right?…because you can have more than one 72t as long as they’re segegrated? But my accountant said that I couldn’t do that. If I understood him, the reason was that according to the formula for calculating the amount of a 72t payout, using a possible retirement age of 54 + life expectancy that the most I could get out, in total, could not be more than $26k/year, which is not enough for my purposes. It seemed to me that he was lumping both theoretical 72t’s…but you’re saying if they’re segregated there’s no problem. Right? And I would be required to keep the 72t’s going until I’m 59.5 years old, right?
V.2006-01-25 12:30, By: V., IP: [162.119.240.102]

L2: 72t pension payoutPlease confirm that you have about $350k in your 401(k) plan and $115k that you can roll into an IRA. My concern is that you have more in your K-plan, and if that is correct what is the total value?
How much do you need each year? I ran the calculator and came up with $31,536 using the Amortization Method. If you will need more than this then I think you will have problems surviving without other sources of income.
Your SEPP Universe can consist of IRA’s and company pension / K-plans. Use this total value in the calculators to see what you can withdraw under 72(t) rules. If you are calculating SEPP distributions on $350k from the K-plan (I get $23,737) plus $115k / 5 =$23,000 for $46,737, that’s wrong. $465k run through the calculator gives you the $31,536 figure above.
Hope you follow this and can clarify your situation.
Jim2006-01-25 13:53, By: Jim, IP: [70.184.1.35]

L2: 72t pension payoutThe amount in the 401k is about $350k. The pension amount is about $115k, roughly. I ran the calculator and got the same amount you did. So when you figure the allowable 72t payments, it’s based on the total amount of money in all of your SEPP accounts–your SEPP universe—…not on the separate totals?
If Itook retirement this year, at age 54, and then next year wanted to move one of SEPP’s into an annuity (I have one in mind which would allow me to do this) would the IRS have any problem with it?
V.2006-01-25 14:22, By: V., IP: [162.119.240.102]

L2: 72t pension payoutIf the annuity is a deferred annuity and is merely an investment of your IRA and all other SEPP assumptions stay the same, no problem. However, if you change any of the assumptions or the payout, you just busted the SEPP. The real question is why at the age of 54/55 you would even consider an annuity – especially if it is an income type annuity.2006-01-25 14:33, By: Gfw, IP: [172.16.1.75]

L2: 72t pension payoutV, I think you now understand the concept of SEPP universe and how to calculate 72(t) distributions, regardless of what your accountant has said. However, check with him / her now that you have this understanding and see if we’re all saying the same thing.
Usinga deferred, variableannuity as an investment for your IRA is ok as far as I’m concerned. Recent developments in annuity design, especially the living benefit parts, make using VA’s for IRA’s very attrctive. Just be sure to check about “free withdrawal thresholds” so you don’t hit a CDSC. You can use VA’s with 3-year surrender periods as well as 0-year surrender periods. Be sure to check this aspect out throughly.
Jim2006-01-25 14:56, By: Jim, IP: [70.184.1.35]

L2: 72t pension payoutThanks for all input. I’ll have to take some time to consider it all.
V.2006-01-25 15:20, By: V., IP: [162.119.240.102]