Early Withdrawal Best Approach
Scenario:
Wife: Birthdate: Jul 26, 1967 IRA Value $520,000 ROTH IRA: $42,000 (of which about $30,000 is contribution and open over 5 years)
Husband: Birthdate: Sep 4, 1971 IRA Value: $910,000 “Old” workplace 401K: $1,100,000
The husband has been contract working since retiring from the “old” workplace where he still has the 401K. The wife is retired but doing side work for around $2500/mo. The husband wants to stop working completely.
What is the best approach to cover their income needs of $8,000 per month? Since the husband isn’t 55 and left his “Old” company before 55 he can’t take out of the 401K without penalty, right? We can convert some of the wife’s IRA to her ROTH IRA and take that money out with 10% since the converted amount is considered a contribution? But is that converted amount subject to the 5-year rule?
Or are we forced into a 72(t) plan? If we are, then does it matter who we do the 72(t) under? Ideally we want to ALSO do ROTH conversions in 2026,2027, etc..etc..
What is the best/cleanest way to go about this?
THANK YOU!!!!!
Permalink Submitted by Alan - IRA critic on Fri, 2025-07-18 21:47
A 72t plan will be needed to avoid the 10% penalty. Husband could directly roll the 401k into his IRA, and then transfer the amount needed to support a 72t into a new IRA and operate the plan from that IRA. The other 100-200k left in the other IRA can be used for emergency needs, subject to penalty. The 401k is not eligible for penalty free distributions due to separation prior to age 55 year. Wife’s regular contribution basis in the Roth IRA is also available for emergency needs tax and penalty free. But if she converts to Roth, any distributions from the converted amounts will be subject to penalty until she reaches 59.5 in about 18 months.
Wife should continue the self employment work if possible.
The withdrawal rate will be about 4% of total retirement assets. Hopefully, when they file for SS the benefits will be above average to make this plan more sustainable.
Permalink Submitted by Arek Puzia on Mon, 2025-07-21 16:00
Thank you Alan. One follow-up question. Oh, and, yes, they both have almost the max SS benefit, so the plan should be sustainable. Is there a “gold standard” way to put together a 72(t) plan? What is the best calculator to use for the annuitization or amortization methods? I assume it’s best to take out each annual payment as one withdrawal on the annual anniversary of the first payment? All the way into the calendar year when the husband turns 59 1/2 (so 2031 would be the final fixed payment based on the 72(t) plan)?
Permalink Submitted by Alan - IRA critic on Mon, 2025-07-21 16:56
Generally, the plan should be kept as simple as possible. That means the calculation should be the fixed amortization method, and the beneficiary data can be omitted from the calculator. The single LE method should be elected, and the interest rate should be 5% for current plans. The age is the age that the IRA owner will be at the end of 2025.
The dinkytown calculator is a good one, but perhaps another calculator should also be used to check if the result is the same. The opening balance should ideally be the latest month end balance of the IRA that will be used for the plan. This plan will end at 59.5 because that is the longer of 5 years or age 59.5.
Distributions in 2025 can be for the full annual or a pro rated by the month of the full annual. For example, if the first distribution was in Sept, then 4 months (1/3 the annual) worth of distributions is OK. These are the only two options for the first year. Most people take out the full annual amount and save the amount not needed that year.
The plan will terminate at age 59.5 (3/4/2031). In 2031 it will be simpler to take out no distributions until after the plan terminates. In 2026-2030, full annual distributions are required in total. The pattern within the year does not matter, but generally the distributions should be limited to 4 per year (eg Feb, May, August, and Nov).