easy 72(t) income tax question

You are here:
< Back

L1: easy 72(t) income tax questionFuture SEPP Plan DOB 8/25/1960 Date of first distribution: March 1, 2015
Hypothetically, in 2016, our standard deduction for married filing jointly will be about $13,000. Our 2 personal exemptions will be about $4,000 each. So we should not have to pay federal income tax on our first $21,000 of income. Is that correct so far?
My question is: If my only income in 2016 is $17,000 from a SEPP from an IRA then I shouldn’t have to pay any federal income tax should I?
Thank you! 2014-02-19 14:18, By: deserttrojan, IP: [69.136.119.28]

L2: easy 72(t) income tax questionThat is correct. You will also have to project yor income thru 2020 as well since your plan must be the longer of 60 months or age 59 1/2, both of which occur in 2020.
But that is not good tax planning. For any client in that position, I would normally recommend having significantly more income that would be taxable in the 15% tax bracket, which is up to about $ 85,000 gross income or $ 65,000 taxable income. Also, in the 15% tax bracket, Qualified Dividends and Long-term Capital Gains are taxed at a -0- rate !!!!! Your planning should preliminarily extend until age 62, 67, and 70 for SS benefits, and 70 1/2 for Required Minimum Distributions. Also, project 2015 income, so you will be able to decide on taking 100% of the annual distribution or 10/12ths of it.
Further, if you are in a 401-K/403-B plan, then consider the fact that ifyou separate from service in 2015, then you will not have to set up a SEPP 72-T in 2015 because there is no 10% penalty for distributions from these plans, if allowed by the employer’s plan, if you separate from service in the year that you will be 55 or older. That is a better option than being locked into a SEPP 72-T plan for 5 years.2014-02-19 15:28, By: dlzallestaxes, IP: [96.245.107.94]

L3: easy 72(t) income tax questionThank you so much for the excellent information. Yes, I do have a 401K with Schwab. I called them a couple days ago. I wanted to do what you suggest because I would be separating from work in my 55th year (about 5 months before my 55th birthday). But they said no I don’t qualify unless I separate from work after my 55th birthday. I understand that the IRS interprets it to be anytime in my 55th year but is it possible that my employer won’t allow it until my 55th birthday? 2014-02-19 16:09, By: deserttrojan, IP: [69.136.119.28]

L4: easy 72(t) income tax questionDo you mean that your employer’s 401-K is with Schwab ?
I would check with your firm’s HR dept., and get a copy of the plan to check if their rules are different from the IRS’. Your interpretation of the IRS rules is correct. I think that the Schwab rep is mis-informed, and THINKS that you must be age 55, but I have never heard of any company having rules that differ from the IRS’.
If your firm’s rule is age 55, then it would be in your best interest to stick it out 5 more months until 9/1/2015 to give you a much better situation.2014-02-19 22:55, By: dlzallestaxes, IP: [96.245.107.94]

L5: easy 72(t) income tax questionAs long as you separate in the year you reach 55 or later, there is no penalty on distributions from the plan. The plan also cannot deny you distributions once you separate, however there is a way they could de value this option. That would be by having a plan provision that would require a lump sum distribution rather than allowing you to take partials until you reach 59.5. If you had to take a lump sum distribution, you would not have a penalty on the amount you did not rollover and retained for expenses, but since this amount would have to fund 4-5 years of expenses itwould probably raise your tax bracket in the distribution year. That might offset much of the penalty waiver advantage. So check on your distribution options post separation.2014-02-20 04:35, By: Alan S, IP: [24.116.67.233]

L6: easy 72(t) income tax questionThanks to you both for the replies. Yes it is my employer’s 401-K that is with Schwab. And I also learned that yes if I take a distribution then it has to be a lump sum distribution meaning whatever I don’t take as a distribution has to be rolled over. Great information. Very much appreciated. Keep up the good work.2014-02-20 22:15, By: deserttrojan, IP: [69.136.119.28]

L7: easy 72(t) income tax questionOne last possibility. Ask HR for the COST BASIS of employer shares in your 401-K.
Many/most employers make their matching contributions in company stock. If it has appreciated significantly over the years, then you could save a lot of taxes, and provide money directly into a non-retirement account, by using a little known tax provision called NUA (Net Unrealized Appreciation of Employer Stock). ( Google NUA, or look it up in J K Lasser “Your Income Tax”, or search this website.) I saved a client $ 100,000 in income taxes with the provision.2014-02-21 00:02, By: dlzallestaxes, IP: [96.245.107.94]

L8: easy 72(t) income tax questionHello everyone. I’m back after almost a year of dealing with computer problems. I now have two new HP’s, Windows 7, i7 processors, and finally things are working. One nasty in the trasition of machines is I apparently received nasty viruses directly from HP. It took several days of working with both HP and Microsoft tech folks to get things working. And yes, Gordon, I’m using Google Chrome.
My only additional comment on this subject is to continue doing your homework to learn all of your options. Since you can’t make periodic distributions directly from the K-plan, then the IRA Rollover and 72(t) plan appears to be your best option.
When you make the trustee-to-trustee transfer directly from your K-plan to the new IRA, you can have them distribute some amount for your immediate cash needs. Since you will be initiating this process in the year you turn age 55, you will pay ordinary taxes on the K-plan distribution butwill not pay the 10% early withdrawal penalty. Just for fun you might call Schwab and get a different rep and ask the question about the age 55 distribution. Odds are you will get a different person and hopefully they will know the correct answer. In any case when you file your taxes you can take care of reporting it correctly.
Good luck.
Jim F2014-02-28 15:34, By: Jim F, IP: [70.167.81.63]