72t and the Federal TSP
client is 56 yrs old, and retired from Federal as LEO , required to retire…due to 20 yrs.
she did two direct rollovers from the TSP,, one in a FIA, the other was a brokerage account, She withdrew several thousand from the brokerage account for her home repair,. rules I see apply to everyone but the FEDERAL employee, is if you retire after 55, there is no tax penalty, no matter if there is a direct transfer of the funds out or not., but now being tole only if she left the funds in the TSP(government 401k) the 72t would be waived. Is this correct? the tax only seems to apply on what she spent of those funds of course
Permalink Submitted by Alan - IRA critic on Mon, 2017-02-20 20:12
That is correct. The age 55 separation from service penalty waiver applies to TSP and other qualified plan distributions, but NOT to IRA distributions after receiving direct rollovers from these other plans. If she had left the funds in the TSP she could probably have used one of the TSP rather inflexible distribution options to avoid the penalty. At this point, for the IRA distributions recently taken, she will owe the penalty unless she qualifies for one of the other penalty waivers available for IRA distributions. If her distribution was done in the last 60 days, she could also roll back to the IRA any amount she still has left and that would eliminate the tax and penalty.
Permalink Submitted by DIANE DAVIS on Tue, 2017-02-21 19:06
With the above response to the IRA withdrawal and the 72t penalty waive being legit only from a qualified account, If she took equalized periodic payments from this IRA annuity account , until she is 59.5 , will that qualify for the exemption, or does she need to withdraw a certain amount into an alternate IRA, and then with draw equalized payments from that account alone for the exemption? One of the articles I have read written by Ed Slott seem to indicate the funds need to be separate from the other funds to do this withdrawal correct to qualify for the exemption
Permalink Submitted by Alan - IRA critic on Tue, 2017-02-21 19:51
A 72t plan generates a distribution of less than 5% of the account value. Therefore you need to estimate what annual distribution is needed to pay your expenses including taxes and unexpected expenses each year and then increase that amount by an inflation factor. If the IRA balance is then larger than needed to generate the distribution, the IRA can be partitioned into two IRAs, one for the 72t plan and the other completely outside the plan to be used for emergency needs. The other IRA operates as insurance against having to bust the 72t plan and then have to pay retroactive penalty and interest. But if the IRA is not large enough, then the entire balance will be needed to fund the penalty free distributions. 72t plans are inflexible and therefore thorough planning is needed before starting such a plan. But such a plan will waive the penalty.