Early Withdrawal

Posts Tagged ‘taxes’

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.

Question: IRA deposit for tax savings with purchase of house coming up?

I just did my taxes and my maximum IRA contribution of $4,000 adds $600 onto my federal return.

Answer: No, you wouldn’t just pay the penalty, you’d also pay tax at ordinary income rates – IRA withdrawals don’t qualify for capital gains rates.

You could deposit money now and get deductions for 2006 and 2007, not for 2008 – you can just make contributions for the current year, or for the previous year up until the filing deadline. Then you could take the money out without penalty, but would still pay tax at ordinary income rates when you file your 2007 return, so any savings on the contribution for 2007 would be a wash since you’d owe 2007 taxes on the withdrawal – you’d deduct $600 for an IRA contribution but add $600 for Ira Withdrawal. For the 2006 contribution, you would save a little since you’d essentially defer taxes on that amount for a year, but your savings would only be any gain on the $600 you took off of this year’s tax return, so would probably only be a few dollars.

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