The age 59½ distribution rule says any 401k participant may begin to withdraw money from his or her plan after reaching the age of 59½ without having to pay a 10 percent early withdrawal penalty. I will set up a 72t distribution and I want to ask a question about the use of the rule of 55. No matter how simple or complex, you can ask it here. Check what options exist with your plan with respect to flexible partial distributions until you reach 59.5. 2012-04-09 16:35, By: Alan S, IP: [24.116.67.233], L3: rule 55 and 72tdlzallestaxes, thank you for this confirmation! Leaving Your Job On or After Age 55. Rule of 55 - Per IRS Publication 575, the Rule of 55 allows an employee who retires, quits, or is fired at age 55 to withdraw without penalty from their 401(k). L2: rule 55 and 72tSTOP. The 72t distribution, also known as the Substantially Equal Periodic Payment or SEPP exemption, is a different thing and can be initiated prior to turning 55 … Under the Rule of 55 (this applies to me) the problem is you can only withdraw funds penalty free from your most recent 401k. The 72(t) rule is, once completing a rollover and a 72t is setup to pay out an income stream, it must continue until the age of 59 ½ has been reached or for a minimum of 5 years, whichever comes last. Then you can tell your IRA company what % to withhold whenever you take distributions, or even -0- withholding if you are disciplined enpugh to file quarterly estimates.2012-04-10 02:59, By: dlzallestaxes, IP: [96.227.217.194], L6: rule 55 and 72tAlan, I don’t know your tax situation, but you would probably be closer to 30% (or more) than 20%. They have brokerage divisions, as well as mutual funds. The Substantially Equal Periodic Payment rule allows you to take money out of an IRA before the age of 59 1/2 and avoid the 10% early distribution penalty tax.This approach is also referred to as 72(t) payments because the rule falls under IRS code section 72(t). So guesses welcomed. I would like more insight into both these questions and thank you! At a risk of adding to the confusion, the "Rule of 55" and Substantially Equal Period Payments are both in section 72(t) of the tax code as exceptions to the 10% additional tax on early distributions. Richard says. The Planner lumps all the Tax Deferred Accounts together. Reply. Typically, access to funds prior to 59.5 years of age subjects one to a 10% penalty unless you choose to withdraw under the 72(t) rule, or take hardship withdrawals. Rule 55 has a Catch 22. Ask us about our No-Fee, No Market Risk 72(t) investment options. I turn 55 on April 17 and will retire April 30. You can decide to start taking 72(t) payments from your IRA at any age. We'll assume you accept this policy as long as you are using this website. If you get the flexible distributions, you cannot use NUA until after they are over at 59.5 since NUA requires an LSD. But you should still get a quote from the plan to see what % the cost basis is. You do have the option of leaving your funds within the 401(k) account, however when you choose to take your funds, you must take an entire lump sum distribution of the account. Alternatives to the Rule of 55 The Rule of 55 is not the only way to take penalty-free distributions from a retirement plan. Am I correct in understanding from your post, that if I have my program admin send me a lump sum distribution of the entire 401k that I will NOT pay the 10% penalty (because I am retiring after age 55 and separating from the company) and my only financial concern is paying taxes on the amount of the value of my 401k? DO NOT DO A ROLLOVER OF YOUR 401-K TO AN IRA. This only applies to funds withdrawn from a 401(k). If you participate in a company retirement plan, such as a 401(k), there's a way you can take a distribution and get out of paying the 10% early distribution penalty if you're under age 59 ½ at the time of the withdrawal. They are not connected as far as i know. Take substantially equal periodic payments pursuant to rule 72t; For those of you interested in an early retirement, the final loophole is likely the most interesting to you. But you could leave the company stock intact until 59.5, and then do a direct rollover of what is left to an IRA with the NUA shares going to a taxable account and use the NUA benefit after 59.5. My benefits program has indicated if I request a full lump sum, they will with hold 20% for federal taxes and I will receive the balance (.20x$374k=$74,800 with holding for taxes and I net $299,200). If you structure to get about $ 15,000 less in 2012, you will be in the 15% tax bracket. by bberris » Sun Dec 10, 2017 9:40 am, Powered by phpBB® Forum Software © phpBB Limited. I have made a forcast of my 2012 taxable income with both my current income and projected income as a retiree (from May to Dec). The classic 72t rule requires you to take a specific amount each year for the longer of … ↳   The Bogleheads® Wiki: a collaborative work of the Bogleheads community, ↳   Local Chapters and Bogleheads Community, Re: IRS Rule of 55 vs. 72(t) Distribution, https://financialducksinarow.com/11686/ ... 7001953125, https://72t.net/72t/calculator/distributions, https://72t.net/72t/InterestRates/AFR/Mid-Term. An SEPP plan allows you to withdraw money without getting the 10% penalty, as long as you adhere to specific rules set out by the IRS. To be really viable, your cost basis should not be much more than 30% of the current value of the shares. But we can now likely eliminate keeping the plan in place since they will not allow anything but a lump sum distribution with the accompanying heavy taxes jammed into one year. An individual age 55 (with the same age beneficiary) who has $250,000 and wants to set up a 72t, (using a rate of 4.23% for example) this would be the payout options to choose from: 72 (t) Annual Payments $8445.95/year ($703.83/mo) To avoid the 10% penalty once you begin distributions, you must continue to take the required distribution using the same method, at least annually, for the longer of five years, or until age 59½. by krow36 » Fri Dec 08, 2017 11:56 pm, Post Do you have a preference for a brokerage company? No guarantees are made as to the accuracy of the information on this site or the appropriateness of any advice to your particular situation. I will set up a 72t distribution and I want to ask a question about the use of the rule of 55. If you retire and roll your 401(k) into an IRA, the rule no longer applies. As dlz indicated, if the options are flexible you should just leave the plan in place and take out distributions as you need them and avoid a 72t plan. An IRS rule allowing IRA account holders to make withdrawals before the age of 59.5 without any penalty, provided they make at least five substantially equal periodic payments.This exempts the account holder from the 10% penalty that would otherwise be assessed. Top. I am modeling scenarios to withdraw ammts to meet my goals and to ideally stay within the parameters of the 28%bracket ($217,400 limit). Post by Bonch » Fri Dec 08, 2017 6:35 pm, Post 2012-04-10 02:26, By: Alan S, IP: [24.116.67.233], L6: rule 55 and 72tIt is a shame that companies are so inflexible. It's known as the Substantially Equal Periodic Payment (SEPP) exemption, or an IRS Section 72(t) distribution. In finance, the rule of 72, the rule of 70 and the rule of 69.3 are methods for estimating an investment's doubling time. Your sponsor might or might not. However, if you have the NUA shares with enough appreciation you could also explore that option. This post explores how. I saved a client $ 100,000 in taxes utilizing this rarely known or undrstood special provision of the tax code.2012-04-09 16:19, By: dlzallestaxes, IP: [96.227.217.194], L3: rule 55 and 72tYes, any distribution you take from this 401k will be penalty free, whether it is partial or full. Now if the plan only offers lump sum distributions, you could still take enough out for this year to get you through the end of 2012 and then you will be forced to start a 72t early next year with your rollover IRA. One key exception though, is a 72(t) distribution. Rule 72(t), issued by the Internal Revenue Service, allows for penalty-free withdrawals from an IRA account and other specified tax-advantaged accounts. 72(q) & 72(t) Distributions (t = qualified funds; q = non-qualified) To discourage investors from accessing non-qualified annuity funds before retirement, distributions are generally subject to an IRS 10% early withdrawal penalty if a distribution is made from the annuity before age 59.5. If that is the case, my 401k is valued at $374K and yes, a portion of that was employer matched funds (they matched me to the 1st 6% dollar for dollar in any given pay period where I made contributions). So now we are back to the direct rollover to an IRA and the 72t plan. The Age 55 Rule for 401K accounts is based on an IRS code that allows penalty-free (i.e, no 10% penalties) withdrawals from a 401K account if you sever employment (fired or retire) in the year you turn 55. Use this calculator to determine your allowable 72T Distribution and how it can help fund your early retirement. I turn 55 on April 17 and will retire April 30. Rule of 72 is the doubling your money formula in savings. If you took out the full amount from the plan, even though there would be no penalty, your marginal rate would be inflated by more than 10%, the amount of the penalty, and the 20% withheld would not be enough. I have three 401k plans but I can only withdraw from one without penalty (the most recent one). Read all of the related postings on this website before you proceed. The IRS Rule 72T allows for penalty free, early withdrawals from retirement accounts. Not only is the penalty waived at age 55 due to separation from service, but it can be as early as age 50 for public service workers. by FactualFran » Sat Dec 09, 2017 4:22 pm. Setting the 'Min IRA/401K Withdrawal Age' to 55 doesn't work. It … I wont get my money till feb. 2019 at this time can I use the rule of 55 and take a … If an individual wants to estimate the rate needed to double their money within 12 years, this can be estimated as 6% from dividing 72 by 12 years. Maybe start a month or 2 later on your 1st SEPP distribution.2012-04-10 15:18, By: dlzallestaxes, IP: [96.227.217.194], This website uses cookies to improve your experience. According to rule 72t, you may take withdrawals from your qualified retirement accounts and IRAs free of penalty, IF you take them in “substantially equal period payments”. If you take a lump sum, you will be taxed on the amount distributed plus any other income that you may have in 2012. by Bonch » Sat Dec 09, 2017 12:26 pm, Post If you are age 50, then it runs until you reach age 59 ½, then it stops. Also, you mentioned that they may be a way to further reduce my tax liability because of the employer matching amount (NUA)? 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