Retiring in the year I turn 55

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L1: Retiring in the year I turn 55I am planning on separating from my company in July of the year I turn 55. What is my best option for taking money out of my 403(b) to avoid penalities beginning in Jan of that next year? From what I read on this board is it my understanding that taking SEPP won”t be necessary since this %% seems to be the “magic year”? What is the federal rational for this?2007-08-21 11:36, By: Linda, IP: [64.80.112.150]
L2: Retiring in the year I turn 55Good afternoon, Linda.
When someone retires or separates from employment during the year they turn age 55 or older, then they may take money from their qualified plan, including a 403(b) plan, without being subject to the 10% early withdrawal penalty. As to your question …
What is the federal rational for this?
are you kidding? Rationale from the Federal Government? Why did they settle on age 59 1/2 and 70 1/2 as the other common action points for Traditional IRA”s and other qualified plans. There is no rationale! That”s just the way Congress formed the law so we deal with it.
The good part of your post is that when you retire “during the year you turn age 55,” eventhough you may not actually be age 55 when you retire, then you can withdraw your funds from the 403(b) plan and only pay current taxes but no 10% penalty.
Congratulations.
Jim2007-08-21 11:49, By: Jim, IP: [24.252.195.14]

L2: Retiring in the year I turn 55Hello Linda:
Actually there is rationale as well as irrationality. The original law; dating back to 1976 contained the age 59 1/2 language (rather irrational). TRA 1986brought in SEPP plans. TRA 1990 (I think) brought in the “Separation At Age 55” rule as we were in one of the heights of right/wrong/out sizing of many corporate giants and the elimination of many defined benefit plans. This resulted in a number to complaints to congress people from early retirees that they had sucessfully been “right sized” right out of their jobs but could not get at their retirement funds without payment of the 10% surtax. Further, many of these retirees were influenced to take the lump sum equivalent of their DB pensions and had that lump sum dumped into their 401(k) account. Had they elected to keep the DB pension and commence immediate monthly payments, many if not all of those payments would have been qualified (meaning exempt from the 10% surtax); however, since they instead took the lump sum, withdrawing the “same” dollars on which to live now hadthe 10% surtax tacked on.Now the irrational part (again); as long as the funds remain in the company sponsored plan, the withdrawals are exempt from the surtax, but, if those same assets are rolled over from the company plan into an IRA, the surtax now applies.
TheBadger
wjstecker@wispertel.net
P.S. Rarely do I support the IRS; however, this is not the IRS”s fault; this is 100% your congressional brain trust at work.

2007-08-21 14:21, By: TheBadger, IP: [72.42.67.76]

L2: Retiring in the year I turn 55So now Linda needs to contact the plan administrator to see what partial distribution options are available. Generally, as long as the plan offers at least an annual distribution, she can manage it to avoid a rollover and SEPP plan. Of course, quarterly or monthly installments would be more convenient. The other variable is how often is she allowed to change the installments to meet changing living costs. If the plan does not offer a combination that is workable, then a SEPP may still be needed.
Yes, she could ask for a distribution sufficient to last 5 years and transfer the rest to an IRA, but the tax bite on 5 years of income would likely more than wipe out the advantage of no early withdrawal penalty.2007-08-21 19:36, By: Alan S., IP: [24.116.165.60]

L2: Retiring in the year I turn 55Linida:
The nice thing about MOST 403(b) plans is how they are funded using a variable annuity andsome use mutual funds. In both of these cases, unlike most 401(k) plans, the plan and the custodianare already geared up for systematic distributions whether it”s annually, quarterly or monthly.You should have little problem receivingdistributions in whatever methodyou need.
CAUTION: If you are using an annuity, set up for “systematic distributions” and not an “annuity payout.” The difference is with the “systematic distribution” you have flexibility to increase ordecrease the amount you receive. However, the “annuity payout,” or “annuitizing the contract,” makes you lose control of the asset in exchange for a lifetime income stream, or “annuity payout.”
The one exception for flexibilityin the 403(b) marketplace is TIAA-CREF which uses a combination fixed and variable annuity. The variable portion gives you flexibility whereas the fixed side has a minium 10-year payout requirement.
Good luck.
Jim2007-08-22 08:24, By: Jim, IP: [24.252.195.14]

L2: Retiring in the year I turn 55I have spent 25 years saving all I can, got my home paid off, raised
child, taken great family vacations and more on our combined income of
only around an average of $23,000 a year – now we are worth about 3/4
of a $million and debt-free. We decided to get 72-Ts set up and
now are almost financially independent with monthly income paying all
the bills. Life is great.
2007-08-27 13:27, By: James, IP: [71.58.65.20]