L1: More questions1. If I separated from employment at age 55 or later, I do NOT have to pay the 10% penalty for partial or lump sum distributions from a 401k and/or defined benefit plan (pension) between the age of 55 and until I reached 59-1/2?
2. I understand now that IRAs are exempted from this age 55 rule, so I could leave my 401k and pension plan as is and just make partial withdrawals without paying the 10% penalty until I reach age 59-1/2? This would eliminate the need to use 72t.
3. If I rollover my 401k and pension plan to an IRA at age between 55 and 59-1/2 I will have to have SEPP or 72t in order to avoid the 10% penalty on early withdrawals?
Now it all depends whether my employer will allow me to leave my 401k and pension in their custody after I separated from employment and also allow me to take partial distributions from my 401k and pension plan. I also know that I will have less control over the types of investments I can make with a 401k and pension plan.
Any advice is greatly appreciated. Forget NUA, don’t have much of that.
Don’t you think they could just make my life simpler? I am not complaining just venting.
2010-12-31 00:05, By: wyzzy, IP: [220.127.116.11]
L2: More questionsI believe that you must separate from service and start distributions in the same calendar year.
If so, and you already separated during 2010, then you must somehow take a distribution tomorrow.
If you haven’t separated yet, then good. Wait until next week.2010-12-31 01:07, By: dlzallestaxes, IP: [18.104.22.168]
L3: More questionsI am talking about next year or 2011.
Does it mean that you agree with all my statements or assumptions above?2010-12-31 01:22, By: wyzzy, IP: [22.214.171.124]
L4: More questionsI think you understand it all completely, and that isn’t easy, even for professionals. You did your research well.2010-12-31 03:18, By: dlzallestaxes, IP: [126.96.36.199]
L5: More questionsYour age 55 separation from service exception is good regardless of when you take your first distribution. That said, if the plan does not offer you flexibility in the amount and timing of your distributions, the penalty waiver benefit could be offset by inflating your marginal tax rate.2010-12-31 22:43, By: Alan S., IP: [188.8.131.52]
L6: More questionsI don’t know exactly what you mean by “the penalty waiver benefit could be offset by inflating your marginal tax rate”.2011-01-02 23:42, By: wyzzy, IP: [184.108.40.206]
L7: More questionsWill provide an example.
Assume you meet the age 55 separation exception, but your employer plan does NOT offer flexible distribution options, only a lump sum distribution. The plan balance is 1ml.
You have 3 years before reaching 59.5 and want to avoid a 72t plan and you estimate your annual income needs are 50k per year. You then do a direct rollover of 850k to an IRA and take out the other 150 to finance your living costs for the next 3 years. There is no penalty, but the 150k must be reported in your income in the year of the distribution, and this results in some of that 150k being subjected to the 28% tax bracket, much more than the 15% you would pay if you started a 72t plan.
Therefore, since the plan would not let you simply take out 50k per year, you would be better off doing a direct rollover of the entire1ml and then setting up a 72t plan that would have to run for 5 years. It would take around 1ml to generate a 72t payment of 50k annually, but you could stay in the 15% bracket.2011-01-03 02:03, By: Alan S., IP: [220.127.116.11]
L8: More questionsThank you Alan, that was a great explanation, and I think that is exactly what I should do to stay in the 15% bracket, if my employerdoes notoffer flexible distribution.
I thank everyone and wish you all a Happy New Year.2011-01-03 16:44, By: wyzzy, IP: [18.104.22.168]