72T QUESTION FOR A 55 YEAR OLD

Submitted by LARRY JORGENSEN on Tue, 2013-08-06 19:30

I have a 55 year old male whois retiring soon with 1.2 million in his 401K/IRA. He wants to take out 60,000 a year for 5 years until he is 59 1/2 and then begin to take out variable amounts thereafter. How can You do this without incurring the 10% penalty?



Submitted by Philip Detlefs on Tue, 2013-08-06 19:51

You can set up a 5 year SPIA for the 60K a year needed.  This is exempt from the 10% penalty.  The rest can be left in a separate IRA that can then be distributed as needed after reaching 59 1/2.

Submitted by Alan - IRA critic on Tue, 2013-08-06 20:41

  • Since he will be separating from service at 55 (or later), he can take penalty free distributions directly from the 401k if the plan offers flexible post retirement distributions. He could also roll over a partial balance to an IRA, leaving behind only the amount he may need prior to 59.5. He could then roll the remainder over at 59.5.  I am assuming that his 401k balance is in the employer plan from which he will separate, not a different 401k plan, and that there is enough in the 401k to fund his annual 60k cash flow until 59.5. This would avoid having to set up a rigid 72t (substantially equal periodic payments).
  • Setting up an IRA SPIA would not work unless the amount distributed was computed using the rules for SEPP plans. At today’s low interest rates, the distribution generated using the full 1.2mm balance would fall somewhat short of 60k annually. There is no penalty exception for an IRA annuity, only for SEPP payments as defined using one of the 3 approved IRS calculation methods.

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