72(t) rule IRA withdrawals
L1: 72(t) rule IRA withdrawalsA woman, age 58 received a 401(k) distribution check from her former employer, less 20% withholding. She would like to do a 60-day rollover but use a portion of the funds to pay down debt. Can she use the 72(t) to accomplish that goal? If so, how are the “substantially equal” payments calculated? Also, will she be required to take those payments after she turns 59 1/2 in 2010?2009-05-13 20:26, By: cashman, IP: [220.127.116.11]
L2: 72(t) rule IRA withdrawalsThere are calculators on this site to use in developing the payment amount on a given IRA balance depending on the starting month. At 58, if she starts a plan, it must run for 60 months before it can be modified. If she busts the plan before the 60 months is up, she owes the penalty and interest for only the distributions she received prior to age 59.5.
Note that if she separated from this employer in the year she turned 55 or later, then her distributions directly from the plan are not subject to penalty (age 55 separation exception). There is no need for a 72t plan if this is the case, and if the debt is not huge, she should hold back enough to cover the debt and her other expenses until age 59.5. The rest can be rolled over to an IRA, but she also has to replace the withholdings to prevent them from being taxable as well. Was the check for the entire lump sum in the plan?
A 72t plan is generally not the best for a large one time payment. It better fits a continuing need for funds throughout most of the plan term, so would have to know the amount of debt to be paid vrs her ongoingfunding needsbeyond this year. For some people in this situation, it works to use the 72t plan, and not to start SS income until the 72t plan ends, unless additional income is needed toward the end.2009-05-13 21:28, By: Alan S., IP: [18.104.22.168]