Retire @ 55 with 72T

You are here:
< Back

L1: Retire @ 55 with 72TI would like to sever from my company in 2008 after 35 years of service. I have $550,000 in a 401K, and $300,000 in company ESOP that the company will transfer to my 401K. I will be 55 years old next week, my wife is 54, and plans to continue working well into her sixties. Plus, I will be covered under her health plan. My expenses are only the mortgage payment, which has 5 years on it to pay off. With my wife”s salary, I estimate thru a 72T, I could live on $30,000 a year. Would you recommend a 72T, or is there something else out there more attractive. Any help would be appreciate. Thanks, Chris.2007-12-30 09:52, By: Chris, IP: [71.205.219.106]
L2: Retire @ 55 with 72THello Chris:
I would 1st suggest that you contact your plan administrator to determine if your plan supports periodic withdrawals. If so, there would be no need to start a SEPP plan; instead simply leave your assets in your 401(k) plan and withdraw whatever you need/want whenever it suits you. This ic called the “Separation of Service” exception to the 10% surtax the only rule being that your assets remain in your 401(k) plan and can not be transferred to an IRA.
TheBadger
wjstecker@wispertel.net
2007-12-30 11:26, By: TheBadger, IP: [72.42.66.180]

L2: Retire @ 55 with 72TBefore you do anything, check with your HR Department to see if you have company stock in your 401-K plan. If so, find out from them the “cost basis” which is the cost to your employer of the shares he put into your 401-K account, probably as his “matching”. This is a special provision of the IRS TAX CODE called “NUA” (NET UNREALIZED APPRECIATED STOCK, or “employer stock” whereby you take a “lump sum distribution” in one calendar year of ALL of these SHARES, pay ordinary income tax rateson the EMPLOYER”S COST BASIS in the year these shares are distributed. Then, you don”t pay any additional taxes until you SELL any of these shares. And the gain is taxed at the SPECIAL LONG-TERM CAPITAL GAINS TAX RATE (15%), rather than ordinary tax rates of 25%-35%. The difference between the employer cost basis and Fair Market Value (FMV) date of distribution is always taxed at only the special 15% tax rate. Additional gains above that FMV are taxed at the same special rate unless sold within 1 year of the distribution. In that case the gain between the distribution date and the sale date within 1 year is taxed as SHORT-TERM CAPITAL GAINS (25%-35%), but the initial appreciation up to the distribution date is taxed at the lower 15% tax rate.
THEREFORE, IF YOU HAVE SIGNIFICANTLY APPRECIATED COMPANY STOCK IN YOUR 401-K, IT IS PROBABLY BEST NOT TO ROLL IT OVER TO AN IRA. MOST BROKERS HAVE NEVER HEARD OF NUA, and will improperly “advise” you to do a rollover.
If you want to read more about NUA, google it, get J.K. Lasser “YOUR INCOME TAX” (2 page narrative), and hire a GOOD tax accountant who understands NUA.
I saved a client like you $ 100,000 in taxes in this way.2007-12-31 10:45, By: dlzallestaxes, IP: [151.197.26.13]

L2: Retire @ 55 with 72THello, Chris:
Congrats on your retirement planning and pending escape from the corporate world. 🙂
TheBadger”s comments are on the money but I would add to them by saying that I was in your exact situation in 2004. Although my company 401k plan did not allow partial withdrawals, the fund selections available to us were not very good. I was pretty sure that these funds would not allow me to properly diversify my holdingsand were of insufficiently high quality (think 2-3 star Morningstar ratings) to properly fund my retirement. Even if they had allowed us to take post age 55 partial withdrawals, I would have gone with a SEPP anyway. It really wasn”t all that difficult, although I did study the process and the rules for setting up a SEPP for a few months before actually doing it. It has worked out quite well, though, and I have no regrets. I”m more than half-way through and have not had any significant problems… knock on wood and all that.
Vanguard has a very good web site and a downloadable brochure of how to create a SEPP plan. This brochure also contains the forms for the three IRS accepted methods of calculating your SEPP distribution amount. You can print the sheet that seems bestto you and use a pencil and calculator to give the calculations a try. They are not all that difficult and are explained in good detail. They walk you through them one step at a time so it isn”t as if you need to deal with some arcane financial formula as-is. Once you have the correct distribution amount, you can use the SEPP calculator on this web site to confirm that you did the math correctly. When I did that, itgave me confidence that all was well. Expect the results to vary slightly. Minedid by about $0.50 on the annual payment. No biggie and probably due to rounding plus the number of decimal places used.
One final comment would be that most custodians today do not code form 1099R as a “2” for SEPPs… even afterwe specifically request a SEPP, fill out all of the relevant paperwork, and start receiving the periodic payments. Instead, we get to fill out form 5329 and include that with our annual tax filing to get the 72t exemption from the 10% early withdrawal penalty tax. Not a big deal timewise, especially if you use a tax program on your computer, but it is a necessary additional step.
Ed_B2008-01-03 11:07, By: Ed_B, IP: [67.170.159.37]