72t Set-up

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L1: 72t Set-upI plan to retire next year on my birthday January 14. I currently have a balance in my 401k and will be receiving a lump sum pension payment. Since I will be turning 55 next year, are any distribution amounts I take from my pension and 401k not subject to 10% penalty tax on early withdrawal because I am 55 and separated from employment? Can I split the remaining balance from either the pension or 401k or both to set up a 72t and a traditional IRA? Do I need a broker to set-up a 72t or just a separate IRA account and declare it a 72t account when I file my tax return at the end of the year? Thank you very much in advance.2010-01-21 01:22, By: willie, IP: []
L2: 72t Set-upSince you will apparently be retiring in the calendar year in which you turn 55 or later, you are eligible to take penalty free distributions directly from the plans of the employer from which you separate. If the plan offers flexible distributions, you will not need a 72t plan. You could roll over the portion of these plan to an IRA that you would not need to access prior to age 59.5, but before you do a rollover, you should check out if you have any potential NUA benefit from any employer shares in the 401k.If you still need to do a 72t plan, you can partition your IRAs into one with a balance needed to generate the distribution amount you need and set up your 72t with that IRA. The other one is kept outside the 72t and can be used for emergency needs or even to set up a second 72t plan later on if you need to.You do not file your plan with the IRS when you file, but you should tell your IRA custodian that you are using their IRA for a 72t plan and try to get any support you can from them. In the end, you may need to file a 5329 to claim the exception if the custodian does not code the 1099R with the exception code 2. Document all your calculations and keep them in a safe place in case the IRS ever inquires about your plan.You just need an IRA account for a 72t plan, but most of these are in brokerage accounts as they offer more flexibility of investments. CD IRAs in a bank are not particularly flexible and banks do not support 72t plans well.This is all a general overview. You should also review the useful information posted on this site for particulars. Feel free to post any follow up questions.2010-01-21 05:07, By: Alan S., IP: []