Other ways for pre 59.5 income?
Hello,
I am a 51 yr old retiree who has a retirement plan with the state. It’s about $1.4M and my plan was to roll it to a series of IRA’s for 72(t) distribtutions for my income needs.
I have been working with an advisor who has been great at educating me about all the laws and procedures for 72(t). This site has also been great to check back with.
Then the fun begins. Just to make myself feel better, I go and meet with another broker whom my co-workeres say “I gotta meet.” So I do and we discuss all the ways he can make me meny and how much income I can take. He mentions the number of about 10% income with no mention of the 10% IRS penalty. When I bring up the pre 59.5 IRS limits and 72t, he looks at me funny. He says I can take income as I need it without an penalty and the IRS can’t tell you what you can and can’t spend. He’s been doing this for years without a problem.
So my questions is this….Am I missing something here? Is there another way to take income from retirement monies w/o an 10% penalty besides 72(t)?? Is this broker for real??
Please help.
Permalink Submitted by Wayne Sexton on Tue, 2007-11-27 19:56
The only ways to take monies out pre 59.5 and escape the 10% penalty is:
death, disability, higher education expenses, and substantially equal periodic payments over the planholders lifetime. With the latter you have 3 choices:
RMD’s, Fixed Amortization, and annuitization
As far as this advisors looking at you funny……I believe that would be a clue that apparently he knows very little about the IRA rules
Permalink Submitted by Alan Spross on Tue, 2007-11-27 21:17
If the plan is a Govt 457b plan, there is no early withdrawal penalty because the plan is not a qualified plan. If a 457b plan will provide you with flexible distribution options directly from the plan, then there is no need to subject yourself to a 72t plan because you rolled it to an IRA. However, the broker cannot get his hands on the funds if you take living expense distributions directly from a 457b.
That said, if you are convinced that your investment return will be improved with an IRA, then the 72t plan would become necessary to waive the early withdrawal penalty from the IRA. With several IRA accounts, you can create one using a “reverse calculator”, that carries the balance to generate the 72t income you need. The other IRAs would not be affected by the 72t and would serve in an emergency capacity, or even to fund a second 72t plan. An 8 year 72t is long enough so that conditions will probably change the needed distribution, so having other IRA accounts is a real plus. A broker would be less likely to be aware of various tax issues than a financial advisor.
Permalink Submitted by Jeff Green on Wed, 2007-11-28 12:58
Thank for the reply….The plan is not a 457b…I have that and wish those 457 laws would apply here to my lump sum. This pretty much confirms what I already knew and was educted about by my current advisor. There is no other way other than 72(t) to get a pre 59.5 income without a 10% penalty.
Thanks for your help.
Permalink Submitted by Jeff Green on Tue, 2007-12-04 13:31
Hey Gang,
One more follow up question on this issue…..
Is there any way (or IRS rule) that says if you have an IRA and say your principle is $1.4M, you allowed to take out just your interest before 59.5 w/o a penalty? Example..The account makes say 9% interest in a given year. Can you take that 9% out w/o penalty below 59.5 and leave the principle alone??
Thanks….
Permalink Submitted by Al Fry on Fri, 2007-12-07 18:49
No – one must do the IRC Sec. 72 (t) SEPP calulation to determine how much one can take out without penalty.
Permalink Submitted by Alan Spross on Fri, 2007-12-07 21:29
If you are looking to reduce the payouts under the SEPP plan, you can partition your 1.4mm IRA into different accounts, and establish the balance in the account you will use for the SEPP to the amount that will yield what you need for your expenses. The other IRA accounts are left outside the SEPP, and can be used for emergency purposes subject to penalty, or even to start a second SEPP plan later on if needed.