elaine sz said:
What is the name of your state?ohio I worked at a major midwest bank for 35 years as a teller---they fired me this past July(another story)---I am 54---have 240,000 in 401k--will turn 55 in june 2006---can I take a distribution from my 401k using the 72t sepp rule?the human resource person I talked to at the bank said i had to be 55 to take money out-and avoid 10% penalty---or do I have to roll it over to an IRA---for the 72t rule to avoid penalty?
I don't know if this is accurate but it will give you something to research on. The person giving the info below was selling something; thus, I don't reference his/her/its website, name, product, etc.
What is a "72(t)" Early IRA Distribution?
I am often asked, “How can I retire early and take money out of my 401k, 403(b),TSA, 457 plan and/or IRA without paying IRS the extra 10% “early withdrawal penalty” because I am NOT age 59 ½ yet?”
It’s very easy to do. I have done it MANY times! IRS has a rule called a 72T, “equally substantial distribution”. By using IRS’s rule 72(t) it ELIMINATES the 10% early withdrawal penalty normally due for withdrawals prior to age 59/12.
Here’s how it works. Let’s say you are still working but want to retire (let’s say in this example) at the age of 55. First you quit working. Then you ROLL your 401k into an IRA. After the rollover is completed you apply for a 72(t) “equally substantial distribution”. The IRS will offer you (3) optional payout amounts. The (3) IRS optional payout methods will tell you how much the “equally substantial distribution” will be based on your age, the age of your beneficiary, the amount of money you have, the % rate used for the calculation and how long they expect you to live (based on IRS's mortality table).
Here is an example for you:
An individual age 55 (with the same age beneficiary) who has $250,000 and wants to set up a 72(t), (using a rate of 4.23% for example) this would be the payout options to choose from:
72(t) Annual Payments
29.6 Years Life Expectancy
$8,445.95 [$703.83/mo] 1] Minimum Distribution Method
$14,894.53 [$1,241.21/mo] 2] Amortization Method
$14,797.28 [$1,233.11/mo] 3] Annuitization Method
The rule is, once a rollover is completed and a72(t) is setup to pay out an income stream, it must continue until the age of 59 ½ has been reached or for a minimum of 5 years, whichever comes last. For example, if you start a 72(t) at the age of 57, it must run until you are age 62, then it stops. If you are age 50, then it runs until you reach age 59 ½, then it stops.
After the 72(t) has stopped, then of course you can take out of your IRA any amount you might desire or require. I need to point out, just for clarification, that YES all the income you receive is Fully “income taxable” at your applicable income tax rate but without any added penalty.
A word of CAUTION!
Do it right and it works beautifully. Do it wrong by withdrawing too much and you can end up broke! PLUS, the IRS may assess the 10% penalty on all amounts withdrawn, if the IRA account runs out of money before the end of the 72(t) scheduled time-frame. That's the rule. Therefore, it is imperative you work with someone who knows what they are doing! CD’s can not be used as an investment vehicle for a 72(t) distribution.
Not all (Financial Advisors, CPA’s, Attorney’s or otherwise) know about this little known 72(t) IRS rule. Also, NOT ALL companies know how to do a 72(t), or how to set it up properly, or even have the mechanical or electronic means available, to do such distributions!
Very few fixed annuities will work (but some will) because most of them do not allow withdrawals greater than the earnings growth. Because most IRA owners want to withdraw more than the current growth rate currently offered by some fixed annuities.
