L1: T72I am 52 years old and will be receiving my 401K in the next few months. My plan is to sign up for the 72t, however, I have been told I cannot do this until I”m 55 or I will pay a huge penalty for withdrawing my funds early. Also, can I withdraw a lump sum, say $20,000.00 and still do the T72? Will I be penalized for the lump sum?I have around $200,000.00.2008-07-16 14:04, By: lu, IP: [22.214.171.124]
L2: T72You can roll your 401(k) into an IRA once you have left your employer. Then, you can take substantially equal periodic payments from the IRA without penalty at any age (you still have to pay taxes) under one of the three formulas spelled out in IRC 72(t).If you leave your employer in the year you turn 55 or later, you can make penalty-free withdrawals from the 401(k). If you leave earlier, you can”t. Spend a lot of time learning all the ins and outs of the 72(t) rule. These boards are an excellent place to start. Bill Stecker”s book (he posts here as the Badger) is also invaluable. Remember, if the rules are not followed precisely, penalties and interest will be due on all previous payments.2008-07-16 15:15, By: Eureka, IP: [126.96.36.199]
L2: T72I forgot to comment on the lump sum you propose taking. Any lump sum you take from an IRA before age 59.5 will be subject to a 10 percent penalty, unless you meet some very narrow exclusions, such as huge medical expenses or disability. One can usually borrow money from a 401(k).If you take a lump sum of any size after you begin taking the 72(t) payments, which must continue for five years or age 59.5, whichever is later, you will bust the 72(t). That would mean retroactive penalties and interest on those penalties. 2008-07-16 15:24, By: Eureka, IP: [188.8.131.52]
L2: T72I agree with the previous posts. Age 55 is not applicable to your situation since you separated from service prior to that age.In your situation, you cannot support a 20,000 distribution under 72t guidelines. Your max within the guidelines would be around 11,300. Therefore, barring other sources of funds, you would probably have to take a penalized distribution as a lump sum before calculating the plan, and could then start the plan using the reduced balance. In your first year of the 72t you have the option of taking out a full annual amount, so you may be able to offset 11,300 against the total amount you will need in 2008 and take the difference subject to penalty up front.
The long term challenge is whether you can get by on this small an annual distribution without busting the plan early on in the months to come. Hopefully, you have another income source or can get a job to increase your income. If you start a 72t plan with an inadequate amount, it is very prone to being busted later on. You have 7.5 years in whicn you will need to adhere strictly to the plan to avoid penalties and interest.2008-07-16 15:46, By: Alan S., IP: [184.108.40.206]
L3: T72I have found another job and I am contributing to a 401k with a match that should be around $6k annually. Hopefully, I can get around $3k interest to add to this amount. If Iam able to this, I”mhoping I wouldn”t bust the plan.I plan to continue to work and contribute toa 401k.I wanted to withdraw the lump sumto make a down payment on a vacation home. I understandaboutpaying the taxes and was hoping the vacation home would help reduce someof the taxes.One individual has told me if I withdraw the $20k, itwould cost me$36k in taxes, this is hard for me to believe. Right now,my estimated income for this year, would be around $70k, which includes, unemployment and alimony (which I will have to pay taxes).Can I roll my money over and then say 12 to 18 months sign up for the 72t then? Can you sign up for this at any time? 2008-07-17 04:29, By: lu, IP: [220.127.116.11]
L2: T72To clarify Alan”s posting, you could take a $ 9,000 distribution before setting up the 72-T. You will be subject to federal (and probably state) income taxes on this, plus a 10% penalty on top of the tax. (If you are in, or this will push you into, the 25% tax bracket, then this will effectively be taxed at 35%, or $ 3,150. Be careful, because you have to plan on where those federal taxes will be paid from. Since you nEED this money or you wouldn”t be taking it out, you probably need to take $ 13,000 out initially, and set aside $ 4,000 for the taxes next April.
Then you can take the ANNUAL DISTRIBUTION of $ 11,300 after the 72-T is set up, but -0- for the rest of 2008. Then in January 2009 you could take another $ 11,300 if you needed it, with -0- for the rest of 2009, or you could start a monthly distribution schedule of $ 941.67 per month. But again, be prepared to pay the income taxes on those future annual distributions as well. If you don”t, you will probably “bust” your plan because of the tax payment needs.2008-07-16 19:22, By: dlzallestaxes, IP: [18.104.22.168]
“If you leave your employer in the year you turn 55 or later, you can make penalty-free withdrawals from the 401(k). If you leave earlier, you can”t.”
Technically, you MAY be able to take age 55 separation from service penalty-free 401k withdrawals. The law allows this but does not mandate it. Some 401k plans allow this and others do not. Many employers do not want the administrative burden of partial 401k payments and only allow “all or nothing” withdrawals.
“One can usually borrow money from a 401(k).”
Yes, one can IF one is still employed.Most 401k plans demand immediate repayment of any outstanding loanbalanceif one separates from service.
Ed2008-07-18 23:19, By: Ed_B, IP: [22.214.171.124]
L2: T72…and to add to Ed B”s point about 401k loans, it is my understanding that if you leave the employer while you have an outstanding 401K loan, and you do not pay it back when asked, (which is usually right away) they simply issue a 1099-R that year that lists the amount left owed onthe 401K loan as a pension withdrawal, which you would have to add to your income that year, and it would alsobesubject to the 10% early pension withdrawalpenalty in your case due to your age. In most cases when this happens to someone, they have no money set aside to cover the extra taxes and penalty that is due to the IRS becasue of this problem. KEN2008-07-19 08:10, By: Ken, IP: [126.96.36.199]