So you have a bundle sitting away in your traditional ira's and 401k, that you can retire on but you don't want to pay the extra 10% the government wants you to pay along with the excess taxes. Well there are a couple loopholes many fatwalleters know, but some may not.
First if you leave your job age 55 or older, you can qualify to get at your money in your 401k, but if you leave before 55 you're out of luck unless you decide to go to another job when you turn 55, convert your money to that 401k, wait a bit then quit. Bla alot of hastle.
Or you can use what is described in 72t of the tax code. Basically this allows you to take equal distributions from your ira, and you must take these substantially equal contributions until you reach 59 1/2 or minimum 5 years whichever is greater, or you have to pay all the 10% penalty, on all the money you take out over the years.
So anyway, you quit your job and convert your big 401k over to the ira and follow the rules and you are set. Only flaw is you can't use something like a cd as your investment tool, because you are taking out monthly more than the interest you earn. However something like a mutual fund would be nice, and if you are conservative like me use something like vanguards prime fund, which is around 5.21% right now, and follows the interest rates.
Although I would have to seriously think if I could set there and get > 10% better return on a some other guaranteed rate fund verses the equivelent of a money market. Actually I am thinking that even giving up 1/2% better say from 5% for mm vs 5.5% for cd, I would think maybe that would just kill the tax advantage, I don't feel like doing math right now, but this is something to dispute and consider, especially considering your total amount may be making the 1/2 less, while you are only saving the 10% on the part you are taking out, realizing that part is only a smaller portion of the investment. Anyway my goal was to basically enlighten people and get a discussion going on this. And I never saw anything that said you could not have more than 1 72t going, so why not just transfer say 250k to one ira, do your 72t there, if you need more money open a second somewhere else, then you are only taking the hit on your smaller part. Maybe someone can correct me there as well, can you have more than 1 72t going?? Of course gotta be careful to not do more than one of those 401k - ira transfers in a year or pay a big tax bill.


Several calculators I found, one was at dinkytown.net the other was at 72t.net

great article on this

www.moneymanagment.info/72T.htm

If you can afford to retire young not sure why you would even need to touch that money? Would think it's better to use other saved money or income from investments/interest till your 59 1/2.

LustfortheMoment said:Retire at 59 1/2???? Not for moi. Freud said that the essence of life is: "To Love and To Work". I plan to be carried out of my office when Judgment Day comes........
Is there a big demand for 75 year old hookers?

I remember some years back reading about the 72t exception in the various "retire early" online communities. Here's one link I found in a quick search.

Retire Early Home Page link

LustfortheMoment said:RETIREMENT is sooooooooooooooooooooooo 50s.......

I've been retired for over four months, and I can say unequivocally, it's the best job I've ever had.

We must face four essential facts, common to all of us.

1. The inevitability of death
2. Meaningless/meaning in life
3. essential existential isolation. We come into the world alone and leave it alone
4. freedom. We are free to make our life ourselves.

If you have addressed these questions truthfully and openly, you will know what to do. But most people don't.

scott1961 said:If you can afford to retire young not sure why you would even need to touch that money? Would think it's better to use other saved money or income from investments/interest till your 59 1/2.

There is alot of ambiguity when it comes to defining 'early retirement': is it 30s, 40s, 50s?. Bottom line is that if you want to retire and live on your assets before being able to withdraw from your 'tax deferred income' without penalty, you need to plan for it. In other words, you need to plan to live off on dividends/interests on the portion that has already been taxed. I don't know if this is heresy or not but I have not came across alot of evidence that early retirees are living from their tax-deferred withdrawals vs. other taxable assets. Given the limits of IRA and 401 contributions, is it really realistic to even consider that this source of income will be that strategic for early retirement?

LustfortheMoment said:Retire at 59 1/2???? Not for moi. Freud said that the essence of life is: "To Love and To Work". I plan to be carried out of my office when Judgment Day comes........

My Uncle Joe once said "Live Fast, Die Young". Saving what I can, retire early, be happy as long as you can, as soon as health or boredom gets to you, skydive over a nude beach without a parachute.

Although I do wonder if it isn't better to use 72t money as I want to call it instead of roth contributed money. To me you want to save taking out the tax free part of your roth until after you start collecting social security, since it doesn't count against your agi, where 401k money would. The 72t money you are gonna pay the same tax no matter what.
So maybe it would be:
use up taxable non-retirement accounts...
use your 72t money,
then after you start the ss checks, start taking from the roths, maybe little at a time to stretch out advantages.

Section 72(t) is not the exemption from the 10% penalty, it's the subsection that imposes the penalty completely. The exception for substantially equal periodic payments is in sec. 72(t)(2)(A)(iv). In other words, you're trying to stay OUT of sec. 72(t), not in it.

Pedantically yours,
LH2004