Thank you in advance for taking the time to answer. I am getting ready to starta 72t after separation from employment atage 56.
1. IfI start monthly withdrawalafter January, canI still withdraw 12 month’s worth of withdrawals in the first year of opening a 72t?
2. Assuming that I can do partial withdrawals from my 401k, can I also have an IRA for 72t at the same time?
I plan to takethe lump sum payment from my employer’s pension plan and roll it over to an IRAfor 72t. Leave my 401k as is, if possible,and make partial withdrawals from itas I please. Otherwise, transfer the 401k balance to another IRA for emergency
NUA does not apply to me.
2011-08-03 22:42, By: wyzzy, IP: [22.214.171.124]
I would suggest a different approach:
1. Since you will be 55 or older, and separating from service, I would not set up a SEPP 72-T. First, because you do not have to, and second because it makes no sense to me to lock yourself into a SEPP72-T plan for 60 months to avoid a 10% penalty, with
very strict regulations and a set fixed amount, when you canhave complete flexibility by taking partial withdrawals from your 401-K whenever you want to.
2. I also would not set up a SEPP 72-T plan at 56 if I can avoid it by using other approaches, like the 401-K to get to 59 1/2, at which time there are no required distributions.
3. I assume that your company pension is separate from your 401-K. If so, then that is fine to rollover to an IRA. Check to see if you have any “after tax” contributions that you made to the pension at some time in the past. If so, then you can roll them
out to a regular non-retirement account tax-free because you already paid taxes on the afterv tax money you contributed.
4. Do not transfer your 401-K to an IRA. If you do, you will lose the ability to avoid the 10% penalty without setting up a SEPP 72-T.
5. Although not recommended, you are allowed to take partialdistributions from your 401-K, and at the same time set up a SEPP 72-T plan and take separate distributions from it. However, watch the income tax considerations because all of these distributions
are taxable income.
6. In the first year of a SEPP 72-T you are allowed to take EITHER 100% of the annual distribution, or a pro-rated amount based upon the remaining months in the year. These are the only 2 options. The 100% option is available whether you start the plan in
Kanuary, December, or any other month. The major criteria is cash needs and income taxes.
2011-08-04 00:43, By: dlzallestaxes, IP: [126.96.36.199]
Bulk of the money is from the pension plan which I want to set up as 72t Ira for additional income, otherwise I do not think that I can leavethe moneyin the pension plan and make penalty free partial withdrawals until I reach the age of 59 1/2. No after
tax contributions here.
401k balance is small and Iintend touse only as emergency fund, if they allow partial withdrawals.
2011-08-04 00:55, By: wyzzy, IP: [188.8.131.52]
Please give us your date of birth, and the amounts in each of the plans/acccounts, as well as your cash needs per year until 59 1/2.
If you, and spouse if any,will not be working, then youmay be in the 15% tax bracket. Careful tax planning would be important.
An expanded retirement PLAN would include consideration of whether to start SS at 62 ( which would be only 1 year after the end of SEPP 72-T at 61), 66, or 70 ( at 32% more than at 66, and 70% more than at 62).
As always, have you considered your health insurance needs, or are you fortuntae to have an employer who covers retirees ? If so, however, be careful because many of them have discontinued retiree coverage.
2011-08-04 01:02, By: dlzallestaxes, IP: [184.108.40.206]
L5: Question #1
With regard to question #1, I did a second 72t that started in May 2007, (when I was buying a second home) and had Vanguard send me “5 months worth” of payments in May 2007, and start monthly ones in June that year and going forward, to get the full “annual
total”in 2007, and they had no problems handling my request. I did an earlier one in March 2005 with another larger IRA and a different custodian when I retired, and started with Semi-Annual Payments in March and September of 2005, for full “annual total”
in year one. After a year of that, I changed it to monthly payments in January of the next year, which were much more manageable from a budget and cash flow standpoint. That original 72t is over now, and the 2nd one ends in 2012.
#2- What you do with401k withdrawals has no impact on the 72t plan you have proposed from an IRA you are setting up. It will only impact the additionaltaxes you may owe to IRS when withdrawing from both. Just don’t later roll the 401k over into the
IRA that is used for the 72t, until afterthe 72t haspassed the “end date” that can be computed on a calculator on this site.
2011-08-04 03:34, By: Ken, IP: [220.127.116.11]
L6: Question #1
Judging from the replies I conclude that the following are allowable by IRS:
1. Yes, at age 55 and over and separated from employment, one can withdraw any amount and anytime, penalty free, from one’s 401k account, if allowable,and also set up a 72t ira at the same time.
2. Yes,in the first year of a 72t Ira, one can withdraw the total annual amount (12 months worth of withdrawals) regardless what month of the year the first distributionwas taken.
If you think otherwise, please let me know.
It is more important to me that I have enough cash to spend rather than deferring income taxes. Deferring taxesis foremost but only if you are not sacrificing your standard of living.
Thank you again.
2011-08-04 14:46, By: wyzzy, IP: [18.104.22.168]
L7: Question #1
Yes is correct for both questions / comments.
One thing I don’t believe I have seen is a positive confirmation from you that you have checked the Plan Document for your 401(k) to determine that you can leave the K-plan inplace
AND take periodic distributions on a monthly or other distribution cycle. If you can’t do this then you need to go to “Plan B” and transfer it to an IRA to take “penalty” distributions if needed.
2011-08-04 15:02, By: Jim F, IP: [22.214.171.124]
L8: Question #1
No, I do not know yet if I am allowed to make partial withdrawals from my 401k plan after I separate from work at age 56. If this is not possible, and since the amount is not substantial, I will take the immediate cash that I need from the 401k(yes, I
will take the tax bite but without the 10% penalty, however, I will not do it this yearbecause that might put me in a higher tax bracketdue tototal amount of income already earned)and roll over the balance to a regular Ira. Then I can withdraw from the
regular Ira as needed and yes, I will pay taxes andthe 10% penalty thistime because it will not be a 72t Ira. At that time I will alsohave my lump sum pension in a 72t Ira and again pay taxes on the distributions but without the penalty.
Sounds like a good plan to me.
2011-08-04 15:23, By: wyzzy, IP: [126.96.36.199]
L7: Question #1
My response is Yes to both of your most recently phrased #1 and #2 questions/comments, with a footnote for others, that you must attain the age 55 or older in the year you stop working in order for the penalty free
early 401k withdrawals to work. For example, if someone had left at age 53, the early withdrawal penalty would apply to all subsequent “pre age 59 1/2” 401k withdrawals, as I understand it. I also agree with
Jim’s comment that appeared as I was posting mine. Ken
2011-08-04 15:03, By: Ken, IP: [188.8.131.52]
L8: Question #1
Rolling over my lump sum pension pensionto 72t Ira, but I would like make a partial cash distribution from it, is the partial cash distribution penalty free? Age 55 or older, separated from work. Thanks.
2011-08-08 20:25, By: wyzzy, IP: [184.108.40.206]
L9: Question #1
Yes, the cash distribution that went to you instead of the rollover IRA will be penalty free. There should be two 1099R forms issued from the plan, the cash distribution coded with exception code 2 and another one coded G for
the direct rollover to the IRA. The cash distribution will be taxable on line 16b.
Therefore, you will probably only need a 5329 for your 72t IRA distribution.
2011-08-08 21:21, By: Alan S., IP: [220.127.116.11]
L10: Question #1
Thank you Alan.
Is the 10% penalty on early withdrawal a fixed tax and cannot be reduced or offset by tax deductions or credits?Or if the10% penalty is $2000,can your tax be lower than $2000 if you had enough deductions?
2011-08-08 22:51, By: wyzzy, IP: [18.104.22.168]
L11: Question #1
No, deductions will not offset any excise tax or early withdrawal penalty.
If you had a refundable tax credit your total tax would be lower than 2,000 (eg earned income credit or refundable child tax ccredit).
2011-08-08 23:35, By: Alan S., IP: [22.214.171.124]
L12: Question #1
When you prepare your tax return, the federal income tax is based upon your taxable income, which is your income minus stadard or itemized deductions and minus personal exemptions.
After that tax is calculated, you add the 10% penalty ( which is 10% of the “early distributions” themselves, not 10% of the income tax).
If you would otherwise have had a tax due of $ 1,000 ( i.e. tax of $ 5,000 – estimated taxes and witholdings), and there was a $ 2,000 penalty ( 10% of $ 20,000 early distributions), then you would owe $ 3,000. On the other hand, if you were due a refund
of $ 3,000 then this $ 2,000 penalty would be offset, and you would get only a $ 1,000 refund.
2011-08-09 00:51, By: dlzallestaxes, IP: [126.96.36.199]
L13: Question #1
Does any one here know if the GATT rate will be replaced by a lower rate so that lump sum payments from pension funds would be larger? I heard thata bill was introducedin congress, is that true? I just hopeit is passedbefore I retire early next year.
2011-08-16 23:20, By: wyzzy, IP: [188.8.131.52]
L14: Question #1
While GATT rates were to be fully phased out by 2012 in favor of anticipated higher corporate bond rates, so far this is not exactly playing out as expected. The corporate rates are much lower than expected, so a 2012 retirement
may not hurt you at all. But the lower rates are increasing long term plan funding problems, but you probably do not care about that.
I have not heard of any plans to change the expected formula for 2012, but if there were any legislation they would probably try to increase the rate, not lower it.
2011-08-17 02:30, By: Alan S., IP: [184.108.40.206]
The IRS allows 401k plans to do partial distributions to those who request them and have left company employment at age 55 or later but does not require them to do so. Because of this, some plans allow partial distributions while others do not. It has
been my experience that many HR people do not know the details of their company’s 401k plan well enough to give a definitive answer on this point. It is best to consult the Summary Plan Document (SPD) for yourself to see if this is allowed. This is a VERY
important point for many retirees and it is one that is well worth not leaving to others, who may not know as much about the company 401k plan as they think they do. Your company HR office should have a copy that you can look though to find this info. You
can also request that they give or send you a copy to keep for yourself. If you do request the SPD copy, they are required to give it to you. They are allowed to charge a small fee for copying and such. Typically, this would be about $10-12 but most companies
don’t charge anything for an SPD copy. If they have to get it from a corporate HQ or some such distant location, it can take a few weeks to get.
2011-08-17 21:01, By: Ed_B, IP: [220.127.116.11]