Avoid 10% penalty on distribution
I have a friend who is age 52 with 30 year service with his company ..about to retire. We have discussed the 72(t) SEPP option for funding his living expenses from age 52 to age 59 1/2 from his 401(k) or rolled over IRA from this 401(k). This will enable the omission of the 10% penalty on his withdrawals. He is looking to take out about 100K per year from his 72(t) designated account (Currently has about $3.0 million)
He believes there is a way to get money out of his 401K (or rolled over IRa if necessary) in a few years at age 55 and being retired without a 10% penalty and not having a 72T Sepp.
If that is the case he might consider taking an early withdrawal from his 401k. paying the 10K (10%) penalty annually for 3-4 years to keep the flexability of his funds after 55 but before age 59 1/2
IS there a provision at age 55 for no 10% penalty. If so under what circumstances . I know there are hardship , medical, education, etc but he does not fit these.[u][/u]
Permalink Submitted by Alan Spross on Tue, 2007-10-30 02:58
The age 55 separation from service exception only applies if the actual separation takes place in the year he turns 55 or later. Being 52, he cannot separate now, and then access the plan without penalty.
That leaves the 72t option either directly from the plan or from an IRA rollover. The IRA is the better way because of better control of the distributions, and he probably will be partitioning the IRA into one account for the 72t using the highest interest rate, with the rest in a different IRA that is not part of the 72t plan. It can be used for emergencies or to fund a second 72t plan at a later date if warranted.
With 30 years service, he should also look at NUA if he has highly appreciated employer stock shares in the plan. Since he has not reached 55, the taxable cost basis of those shares would incur the 10% penalty in addition to taxes. But he should still get a cost basis quote from the plan in case that basis is compelling, eg less than 25% of the current FMV.
Another option to explore if the plan permits is to leave the employer shares only in the plan and transfer the rest to a TIRA from which the 72t will be formulated. He could wait until age 59.5, which is another triggering event for NUA, and then distribute the shares to a taxable account. The additional growth for those 7.5 years would be NUA, and he could then get the lower LT cap gain rate when he chooses to sell the shares. Of course, that depends on what Congress does with those low rates that expire after 2010…….