Age 55 Plan Exemption
A client is 57 and is considering early retirement from a company he has worked at for over 30 years. To provide income during the interim years before he turns 59 1/2, we are trying to come up with an alternative to the 72(t) plan. Here’s our thought:
Roll over all funds in the 401K to a traditional IRA, with the exception of an amount sufficent to provide income until he turns 59 1/2. Then periodically (monthly) withdraw the remaining funds from the 401K as needed for income over the next two years. After turning 59 1/2, we can look to his traditional IRA for an income source throughout retirement.
I realize we will have to research the company plan to make sure they allow multiple withdrawals from the 401K. But, from an IRS standpoint, do we have a problem making [b]multiple withdrawals under the Age 55 exception?[/b]
Permalink Submitted by Jim Shope on Mon, 2007-10-01 17:06
Hi Brian,
I am not a tax-advisor, but I believe that you are correct in what you are trying to do. My understanding to avoid the 10% penalty for early withdrawal from a 401k is: while employed with the company that has the 401k plan in question, you follow these three steps: 1. Attain Age 55, 2. Separate From Service, and 3. Take distributions from your 401k.
You make a good point in reference to what the plan will allow. Some plans allow you 1 transaction – period! While others will let you do many distributions. So, it would make sense to me that if the plan allows multiple transactions and the first one is to roll a major portion into an IRA and then take distributions out of the 401k (assuming 1, 2, and 3 above are followed) that those 401k distributions would not have the 10% premature penalty apply.
Jim
Permalink Submitted by Alan Spross on Mon, 2007-10-01 23:58
I agree. The key is the plan providing for installment payments, at least until age 59.5. If the plan requires a lump sum, the marginal tax rate will likely be inflated enough to offset any advantage of the penalty waiver.
Should the plan not offer periodic withdrawals, then the 72t plan may be needed. But it is wise to avoid the 72t if you can by taking installments directly from the 401k plan.
You should also be aware of any highly appreciated employer shares in the plan that would provide an opportunity for NUA, especially after a 30 year time period. This should be checked out before employer shares are transferred to an IRA or sold in the plan. If the plan provides installments, the penalty would be waived, and reaching age 59.5 constitutes another triggering event for NUA. That’s then the lump sum distribution of employer shares to a taxable account and IRA transfer of other assets should be completed.
Permalink Submitted by Brian Standage on Wed, 2007-10-03 20:58
Thanks for the info.
Yes, we are actually wrestling with the possibility of NUA also. And with that in mind, we are proceeding with caution to make sure we don’t harm our chances with NUA.