72t plan

L1: 72t planHello, I was thinking about starting my 72t distributions in January 2007. I have read Bill Steckers book and review this site every day. I feel that I have a good grasp on how to implement my 72t . I also have talked to the company where I have my IRA and feel comfortable in progressing forward. Here are a few facts

Myself: Age (will be 55 in April 2007)
Wife: Age (will be 47 in March 2007)
Combined income 140,000
401K: 70,000
IRA 1,200,000
I would like to withdraw 78,000 a year from my IRA. We would like to continue to work for the full year of 2007. We would raise our 401K contributions to the max, which would effectively reduce our increase in income by 20,000. In January 2008 we would both stop working
My motive for doing it this way is two fold:

The excess income collected in 2007 will be used for a home project that we would normally have to finance.

Start the 5 year clock (I will be 591/2 a month before the 5 years end)

My 401K (which should be worth ~95,000) can be left with my current plan for emergencies (no partial distributions) and when we do stop working there will be only 4 years left on the 72t.

I have talked to the accountant that does my taxes and he’s against starting the plan under the general idea that you should NEVER touch your retirement money until you are too old to enjoy it and he also gave me a -what’s that look when I brought up SEPP.

My question is can someone tell me if this really a bad plan because we continue to work for 1 year after starting the 72t?2006-10-04 12:02, By: John, IP: [207.138.81.21]

L2: 72t planHello John:
On its face there is nothing terribly bad about your plan; however, I do have a couple of comments:
1. By creating an income bubble in 2007; that extra $78,000 will most likely all be taxed at 28% federal plus state tax; call it 30% or $23,400 in extra income taxes. If the project costs $50,000 you might actually be better off financing the project with a HELOC which would most likely be tax deductible. This is a close call that only you can work out with a detailed spreadsheet.
2. If you have zeroed in on $78,000 per year, you should probably split the $1.2mm IRA into a $1.0mm and a $200k IRA.
3. It may be time to look for a new accountant.
Regards
TheBadger
wjstecker@wispertel.net
2006-10-04 17:03, By: TheBadger, IP: [72.42.67.160]

L2: 72t planThe Badger is right. Get a new accountant.
I think I would consider the reverse approach. As Bill said, finance the home project with a Home Equity Line of Credit, or Home Equity loan. The interest is deductible. In January, 2008, after you have separated from service (and are 55), you can withdraw any or all of your 401-k (with plan administrator approval) WITHOUT A 10% EARLY DISTRIBUTION PENALTY. Your remaining home equity or IRA accounts (with 10% penalty only on funds needed)can be your “emergency funds until you reach 59 1/2. Then everything is available without penalty. Why subject yourself to possible cumulative penalties if you have to bust the SEPP in an emergency?
Do a cash flow projection for the next 5 years. Consider the effect of NOT funding your 401-Ks the next year, and thereby avoid the possible 10% penalty. It will be taxed at the same 25% tax rate in 2007 or when you take it out.
Just some other aspects to consider — with a good tax advisor working WITH YOU, not against you.
P.S. Any employer stock (NUA) in your 401-K to take into consideration ?2006-10-04 20:51, By: dlztaxes, IP: [4.175.9.169]