Early Withdrawal

Question: Taking money out of a 401K, Early Withdrawal?

It is my understanding that you can begin taking money out of a 401K, WITHOUT PENALTY, if you are 55, retired and setup withdrawl payments over a period of time. Is this correct ?
Jim W, thanks for the link but you need to read it yourself befor saying 55 is not 59 1/2. The link you sent says you can withdraw at 55 if you “sepereate from service” ie: retire.

Answer: Hi There,

I have some information for you, yes you can do this via what is called a 72t election:

****Rule 72t for those under age 59½*****

If you need IRA distributions prior to age 59½, the IRS does let you tap your plan and also avoid the 10% penalty for early IRA distribution. The simple rule is to set up a stream of lifetime equal distributions. For example, if your life expectancy at age 59 is 20 years and your IRA is $200,000, then it’s okay to take 1/20, or $10,000 annually. Of course, the calculation is a little more complex than this as the IRS must be assumed to earn interest that is not more than 120% of the federal mid-term rate (published monthly by the Federal Reserve).

You can change the amount under the above calculations after 5 years and attainment of
age 59½.

Here’s an IRA distribution example for a client age 52, spouse age 48, joint life, assuming lump sum of $800,000 and a projected interest rate of 6.72% (which is the IRS guideline). The 72t IRA distributions could be any of the following:

* Minimum distribution method – $24,845
* Amortization method – $57,451
* Annuitization method – $64,616

Note the age of the client in this example is age 51. He and his wife also had a college-age child. To create flexibility, the qualified plan distributions can be rolled into multiple IRAs. In this example, the client actually rolled the IRAs into three separate accounts utilizing the 72(t) option for two. The first was on a monthly basis; the second paid annually, and the third remained intact so the account could grow. Since no payment was being made from the third account it could be used for college funding, if needed. (Remember, higher education expenses are one of your exceptions under the 10% penalty rules). This is a great way to create IRA distribution flexibility under the 72(t) election.

I hope this helps you, let me know if you have any questions and I will try to answer them.

Thanks.

Can I Avoid The 10% Early Withdrawal Penalty? by Bill Losey, CFP.