Retire before 59 1/2 72t discussion

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

If you're thinking of retiring fairly young (or even middle aged), the actuarial amount for your required annual distribution will not be that large as a fraction of your total IRA value. If you figure that you'll live to be roughly 80, then when you're 40 you've got 40 years left. Then you can/must take out 1/(40 years left) = 2.5% of your account value that year. If you're 50 and have ~30 years left, you can take out 1/30 = 3.3%. Given that many folks are willing to "live off" of 4% withdrawals from their asset base, this means you'll need access to more money than just your 72t exclusion can get you until you're about 60 years old anyway.

ellory said: My read of section 72(t) is that you are allowed to take out more than your investment spins off, but don't have to.
I don't think this is the case. Think about it - if you could take your minimum amount or more, how is that different than being able to take out any amount without penalty? There is certainly no penalty for running out of money and not being able to continue your distributions (that much was clear). I think when using the actuarial tables to determine your requirement annual distribution that you must take that much, not more and not less, to avoid the 10% penalty. Hopefully we can get an expert to weigh in on this.

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........

Why do people place so much credence in quotes from old dead guys?

Who cares what Freud said... really.

^^^Well, that's the urban myth...

Question about "72(t)" and Roths.... In my googling I couldn't find a specific answer to whether the distributions are TAX-free in addition to penalty free if they should occur before 59.5 (or whatever qualified distribution). Anyone know? Links welcome.

MaddHatter said: Question about "72(t)" and Roths.... In my googling I couldn't find a specific answer to whether the distributions are TAX-free in addition to penalty free if they should occur before 59.5 (or whatever qualified distribution).Substantially equal periodic payments would not make distributions qualified, and would not make nonqualified distributions tax-free. But, nonqualified distributions are always tax-free up to your contribution amount (and aged conversions). So, say you contribute $80,000 over the course of 20 years before you retire at age 56, at which point the Roth IRA is worth $200,000. Then you could take out up to $80,000 from it over the next 3.5 years tax-free; instead of doing substantially equal periodic payments, just be careful not to take out more than that before you're 59 1/2. (In contrast, with a traditional IRA, you'd be paying tax and penalty from the first dollar you withdraw, absent an exception.)

lh2004 said: Substantially equal periodic payments would not make distributions qualified, and would not make nonqualified distributions tax-free. But, nonqualified distributions are always tax-free up to your contribution amount (and aged conversions). So, say you contribute $80,000 over the course of 20 years before you retire at age 56, at which point the Roth IRA is worth $200,000. Then you could take out up to $80,000 from it over the next 3.5 years tax-free; instead of doing substantially equal periodic payments, just be careful not to take out more than that before you're 59 1/2. (In contrast, with a traditional IRA, you'd be paying tax and penalty from the first dollar you withdraw, absent an exception.)

As I said in one of my earlier posts, if you had put 80k in your roth and it is now worth 200k yes, you could take your 80k out without tax, but you miss out on the tax advantage you would gain by waiting until SS kicks in, and you basically could get to this money without it increasing your AGI. Note all 401k money you take out at SS age, counts against your AGI, which if you take enough out you start to reduce your earned SS benefits...
Anyway I realize you are really answering someone elses question there, I just wanted to add a little.... one old quote... there are 2 certainties, death and TAXES!!