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Author: pneff100 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19483  
Subject: Basic Questions Date: 11/5/2001 9:48 PM
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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?
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Author: BubbaSan Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7468 of 19483
Subject: Re: Basic Questions Date: 11/5/2001 10:39 PM
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Nahhh !! - no law says they have to be rolled over. But Uncle Sam is gonna really love you, in other words, it's not all your money. Congrats on your new tax bracket.

Bubba

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7470 of 19483
Subject: Re: Basic Questions Date: 11/6/2001 2:33 PM
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....but why? It's my money. The company says so. ...

Yes, it is your money but taxes have not been paid on it yet. So the IRS want to make sure they get their (un)fair share.

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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: 7473 of 19483
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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Author: pneff100 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7475 of 19483
Subject: Re: Basic Questions Date: 11/7/2001 12:58 PM
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"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,"

Big "Thank You" to Russ. My question was serious. His answer puts the retirement money into perspective. I guess I should play by the rules for tax purposes. The bottom line seems to be that after I'm 59 1/2 I can use the money anyway and in any amount I see fit. Just have to pay income taxes. Makes sense.

I'll be careful to do a direct rollover. I guess Charles Schwabe could handle that?

Thanks,

Phil

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Author: mustbenuts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7476 of 19483
Subject: Re: Basic Questions Date: 11/7/2001 5:15 PM
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If you are 55 years of age and separated from service, you can withdraw from your 401K without penalty. Roll the 401K into a special rollover IRA and don't comingle before 59 1/2 years of age.

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Author: janicedowden One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7478 of 19483
Subject: Re: Basic Questions Date: 11/8/2001 1:25 AM
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Mustbenuts wrote: "If you are 55 years of age and separated from service, you can withdraw from your 401K without penalty. Roll the 401K into a special rollover IRA and don't comingle before 59 1/2 years of age."

Please explain your comments further. I understand that if you separate age 55 or over, you can withdraw from 401K without 10% penalty (as long as your 401K holder allows it).

But I thought that you lost that penalty protection if you rolled that 401K into an IRA, and if you withdrew from that IRA before 59-1/2, you would be hit with the 10% penalty.

Anyone out there for sure on this? Just want to clarify. Thanks.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7480 of 19483
Subject: Re: Basic Questions Date: 11/8/2001 5:46 AM
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Janicedowden writes:

I understand that if you separate age 55 or over, you can withdraw from 401K without 10% penalty (as long as your 401K holder allows it).

But I thought that you lost that penalty protection if you rolled that 401K into an IRA, and if you withdrew from that IRA before 59-1/2, you would be hit with the 10% penalty.

Anyone out there for sure on this? Just want to clarify.


Be assured your understanding is correct and the original poster is mistaken. As long as the worker separates from the employer sponsoring the plan in the year that worker reaches or will reach age 55, then the worker may take money from that plan without penalty, but subject to the distribution rules in effect for that plan as specified in the plan document. However, if that worker moves that money to an IRA (comingled or not), then the plan money immediately becomes subject to IRA withdrawal rules, so the worker can't touch that money without penalty prior to age 59 1/2 unless one of the eight exceptions we discuss at http://www.fool.com/money/allaboutiras/allaboutiras01.htm applies.

Regards..Pixy

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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: 7481 of 19483
Subject: Re: Basic Questions Date: 11/9/2001 10:06 AM
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Author: pneff100 Date: 11/7/01 12:58 PM Number: 7475
I'll be careful to do a direct rollover. I guess Charles Schwabe could handle that?

Yes, I'm sure Charles Schwabe would be glad to handle it for you.

Russ


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