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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19403  
Subject: Re: Basic Questions Date: 11/6/2001 8:09 PM
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Author: pneff100 Date: 11/5/01 9:48 PM Number: 7467
I now have a corporate retirement plan. I'm still working. I also have a 401k plan. I'm 56 years old. Let's say I retire and take "lump sums" for both of these. It's over a million dollars. I understand these have to be "rolled over" into special types of accounts, but why? It's my money. The company says so. Once the money is in these new accounts why can't I spend, withdraw etc. as I see fit. Suppose I don't want to just switch things around for investment purposes, but want to buy a house in the Bahamas?

First, remember that taxes have never been paid on the money in the 401(k). You can't touch the money without paying taxes.

If you take the lump sum option, you don't have to roll it into an IRA if you don't want to. However, if you don't you'll get hit with income taxes on the full $1M, which will put you in the highest bracket of 39.6%. Also, remember that in this bracket most deductions go away, so the total effect is much more than it appears.

If you do a direct rollover into an IRA, you will owe no current taxes, and taxes on gains will continue to be deferred. I highlighted the word Direct, because if you take the funds into your possesion, you can still deposit them into an IRA, but the 401(k) custodian will withhold 28% for taxes. You will have to make that witholding up out of your own funds if you decide to put the funds into an IRA. So, it's always best to do a direct rollover where your 401(k) custodian sends the funds directly to your IRA custodian.

Once the money is in the IRA, there is nothing stopping you from simply withdrawing the money anytime you want to, as long as you understand you will pay an additional 10% income tax penalty, above ordinary federal income taxes, if you are under 59.5 years old.

However, if you retired, and need money, there is a special IRS rule called the 72(t), which allows you to establish 'SEPP' or Substantially Equal Periodic Payments. This rule allows you to get around the 10% penalty. If you invoke this rule, there is a calculation to determine how much you can take each year. Then, you must continue to take the annual calculated withdrawal for a minimum of five years or 59.5 years of age, whichever is longer. In your case, at 56, you would need to take the SEPP distributions until you're 61.

There are also several different ways to calculate SEPP's. Each results in a different percentage withdrawal each year. You choose the one that gets the yearly amount where you want it.

You can also split your IRA up into several IRAs and establish SEPP withdrawals on one or more individually if you want to. This allows you to decrease the annual withdrawal, but it won't help you increase it.

There is much more detail on this in the Fool Retirement area at http://www.fool.com/retirement/manageretirement/manageretirement1.htm Click on 'Getting the money early'.

Hope this helps,

Russ
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