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Author: fraDcat One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75385  
Subject: confused about early retirement and withdrawls Date: 1/10/2004 1:39 PM
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While at dinner at my parents home I told them about the company SIMPLE-IRA we're being offered. My mother made a comment that confused me, so I figured I'd ask for some more help.

She mentioned(this is her belief) that if all our money is tied up in retirement accounts(401k, SIMPLE-IRA and Roth's) we'd have to pay a penalty if my wife or I retired early. So if my wife chooses to retire at 40 we pay penalties on any money we withdraw becuase she's not of "retirement age".

I was always under the impression the penalty for early withdrawl was for those NOT retired. If it's a retirement account AND you're retired why would there be a penalty? I thought the rules basically required minimum withdrawls by a certain age(59 for some and 70 for others).

If what my mother said is true then I really think it may be wise for us to have some money in a taxable account even if we don't fully max all the retirement accounts we have access to. We're not sure if we will retire early but I'd be upset if say in 20yrs we wanted to BUT had to pay penalties becuase our money was in retirement accounts. That just doesn't seem fair to me.

Any input on this would be greatly appreciated,
Brad
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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38452 of 75385
Subject: Re: confused about early retirement and withdraw Date: 1/10/2004 1:46 PM
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If what my mother said is true then I really think it may be wise for us to have some money in a taxable account even if we don't fully max all the retirement accounts we have access to. We're not sure if we will retire early but I'd be upset if say in 20yrs we wanted to BUT had to pay penalties becuase our money was in retirement accounts. That just doesn't seem fair to me.

There *are* age requirements, but I recall that there is a strategy to avoid penalties if you take "substantially equal payments" from your retirement plan.

People on the "Retire Early Home Page" message board will be able to help you:
http://boards.fool.com/Messages.asp?bid=112992

In any case, even with penalties, the tax deferral will make it worthwhile.

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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38454 of 75385
Subject: Re: confused about early retirement and withdraw Date: 1/10/2004 3:37 PM
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Your mother (as always) was correct. A 10% early withdrawal penalty is assessed whenever withdrawals are made from deferred accounts before the age 59 1/2 (sometimes age 55). However, there are mechanisms called substantially equal periodic payments to avoid these penalties. See www.72t.net for details.

TheBadger


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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38457 of 75385
Subject: Re: confused about early retirement and withdraw Date: 1/10/2004 6:52 PM
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>>>>I really think it may be wise for us to have some money in a taxable account even if we don't fully max all the retirement accounts we have access to.<<<<<

That is a good idea.

The taxable account can be used for anything without penalty.

Also the taxable account would taxed as LTCG where many retirement accounts (sans Roth) are taxed as OI.

The Good thing about the penalties is that it keeps one from blowing it on bull$hit.

buzman

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38458 of 75385
Subject: Re: confused about early retirement and withdraw Date: 1/10/2004 7:33 PM
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Let me summarize the prior answers.

Your mother is correct. There is a penalty if you tap your IRA or 401k before you reach 59 1/2. You can avoid that penalty by taking what are called Substantially Equal Periodic Payments (SEPPs). These payments are exactly that - the same amount each year (with some minor variation allowed). They must contine until you are 59 1/2 or for at least 5 years if longer.

Because these payments are going to be the same from the time you retire until you're 59 1/2, I'd highly recommend having some significant amount set aside in a taxable account to allow you to take more or less out of that as you need in retirement.

If all of your money is in IRAs, and you retire at 40, then you would have to be taking SEPPs for 20 years. That's a long time to be on a fixed income with little flexibility.

--Peter

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38459 of 75385
Subject: Re: confused about early retirement and withdraw Date: 1/10/2004 9:46 PM
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ptheland writes,

Let me summarize the prior answers.

Your mother is correct. There is a penalty if you tap your IRA or 401k before you reach 59 1/2. You can avoid that penalty by taking what are called Substantially Equal Periodic Payments (SEPPs). These payments are exactly that - the same amount each year (with some minor variation allowed). They must contine until you are 59 1/2 or for at least 5 years if longer.

Because these payments are going to be the same from the time you retire until you're 59 1/2, I'd highly recommend having some significant amount set aside in a taxable account to allow you to take more or less out of that as you need in retirement.

If all of your money is in IRAs, and you retire at 40, then you would have to be taking SEPPs for 20 years. That's a long time to be on a fixed income with little flexibility.


Not if you use the life expectancy or "minimum method" for your SEPP.

I retired in 1994 at age 38 and have been making SEPP witdrawals since 1996 under the minimum method. Since the withdrawals increase (or decrease) with your year-end portfolio balance, it's very likely that they'll grow over time.

http://www.retireearlyhomepage.com/wdraw59.html

My annual SEPP withdrawal has been greater than my living expenses since 1997.

intercst


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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38461 of 75385
Subject: Re: confused about early retirement and withdraw Date: 1/10/2004 11:46 PM
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"Since the withdrawals increase (or decrease) with your year-end portfolio balance, it's very likely that they'll grow over time."


That's what I thought when I retired in January 2000. Figured in a couple years I'd be banking the extra from my SEPP. We all know what happened to the market in 2000, 2001 and 2002. Based on 12/31/02 IRA balance my 2003 withdrawal covered only 2/3 on my expenses. Good thing I had substantial investments in taxable account to make up the difference. Good news is this year's withdrawal is my last required under SEPP and will cover over 80% of expenses.

Moral of the story: Have a BIG safety net if you RE.




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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38462 of 75385
Subject: Re: confused about early retirement and withdraw Date: 1/10/2004 11:56 PM
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Not if you use the life expectancy or "minimum method" for your SEPP.

After I posted, I figured someone would call me on that one.

Since the withdrawals increase (or decrease) with your year-end portfolio balance, it's very likely that they'll grow over time.

Well, I wouldn't say that they're "very likely" to grow. That depends on the underlying investments. As you said, a couple of Enrons or Worldcoms in a highly concentrated portfolio can make a bit of a mess. For the IRA balance to grow, the earnings would have to be greater than the SEPP distributions.

However, since the life expectancy tables end up in distributions from about 2.5% to 4% of the IRA balance under the minimum method, a reasonably diversified portfolio does stand a fair chance of returning more than the SEPP distributions over the long-term.

My annual SEPP withdrawal has been greater than my living expenses since 1997.

That just means that you managed to get a significant amount into your IRA during your working career. (And/or your living expenses are unusually low - or some combination of the two. Perhaps there were some 401k rollovers included in the IRA?) With the current limits on IRA contributions ($3000 growing to $5000 in a few years) I would imagine that someone trying to duplicate your success would need more than just IRA contributions to retire before 40. After maxing out 401k deferrals (or especially if there's no 401k available), the next logical choice IMHO would be taxable savings.

--Peter

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38464 of 75385
Subject: Re: confused about early retirement and withdraw Date: 1/11/2004 1:38 AM
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ptheland writes,

That just means that you managed to get a significant amount into your IRA during your working career. (And/or your living expenses are unusually low - or some combination of the two. Perhaps there were some 401k rollovers included in the IRA?) With the current limits on IRA contributions ($3000 growing to $5000 in a few years) I would imagine that someone trying to duplicate your success would need more than just IRA contributions to retire before 40. After maxing out 401k deferrals (or especially if there's no 401k available), the next logical choice IMHO would be taxable savings.


That's correct. At least 90% of my IRA assets are money I rolled over from a 401k as I job-hopped through the 1980's and early 1990's. I agree that one is unlikely to retire before age 40 on a $3,000 annual IRA contribution.

intercst



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Author: tymmo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38465 of 75385
Subject: Re: confused about early retirement and withdraw Date: 1/11/2004 2:12 AM
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That's correct. At least 90% of my IRA assets are money I rolled over from a 401k as I job-hopped through the 1980's and early 1990's. I agree that one is unlikely to retire before age 40 on a $3,000 annual IRA contribution.

intercst



Uh oh.


(yeah, I bother to go to relevant boards)

Are you saying that 1) some companies offer GOOD 401ks, not true from your priors?

2) You benefitted from these (from your previous posts no one but the evil should) ?


3) Howard Dean should NOT TAX these obvious grossly-inflated excess profits from "the" rich, to give to those who so are desperate for a good meal and their prescription "rights" from people like you?

4) It should be more than a 3K contribution to 401k's? Whoa, getting dizzy here!

5) If you claim to job hopping for over 10 years, doesn't that mean you haven't found your purpose?

6) and, for the last time, i ask whether you would have retired if your lucky stock choices weren't right....suppose Pfizer dropped 99%?

And I don't claim to be an angel here...just pointing out some errors...of which i have made many...

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38466 of 75385
Subject: Re: confused about early retirement and withdraw Date: 1/11/2004 3:25 AM
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tymmo asks,

<<That's correct. At least 90% of my IRA assets are money I rolled over from a 401k as I job-hopped through the 1980's and early 1990's. I agree that one is unlikely to retire before age 40 on a $3,000 annual IRA contribution.

intercst>>

Uh oh.

(yeah, I bother to go to relevant boards)

Are you saying that 1) some companies offer GOOD 401ks, not true from your priors?


I suppose some companies do offer good 401k plans. My investment results improved considerably after I rolled my 401k money into an IRA and had complete control over my investment choices

2) You benefitted from these (from your previous posts no one but the evil should) ?

3) Howard Dean should NOT TAX these obvious grossly-inflated excess profits from "the" rich, to give to those who so are desperate for a good meal and their prescription "rights" from people like you?

4) It should be more than a 3K contribution to 401k's? Whoa, getting dizzy here!


The $3,000 limit applies to IRAs. As ptheland points out, you won't have enough money to retire on your IRA alone unless it includes substantial assets rolled over from a 401k. Surely you understand the difference between an IRA and 401k?

5) If you claim to job hopping for over 10 years, doesn't that mean you haven't found your purpose?

Not at all, it means I jumped from company to company in a string of raises and promotions that allowed me to retire at age 38.

6) and, for the last time, i ask whether you would have retired if your lucky stock choices weren't right....suppose Pfizer dropped 99%?

Pfizer makes up about 10% of my portfolio. I'd still be retired with a withdrawal rate below 2% if Pfizer went bankrupt on Monday.

tymmo: And I don't claim to be an angel here...just pointing out some errors...of which i have made many...

I'm glad you recognize your errors, tymmo. It seems that most involved reading comprehension. Do you need bifocals? <LOL>

intercst

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Author: tymmo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38467 of 75385
Subject: Re: confused about early retirement and withdraw Date: 1/11/2004 3:41 AM
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My investment results improved considerably after I rolled my 401k money into an IRA and had complete control over my investment

I can completely agree with this. the complete control over my 401k changed my entire world view...with much better results!


Surely you understand the difference between an IRA and 401k?


yes. sorry for the lingering animosity, which is my fault. Without excuse, my staying at my job and desire to "live" created an intolerable situation.

I'd still be retired with a withdrawal rate below 2% if Pfizer went bankrupt on Monday.



that is good to know. My investments are almost completely in indices, which i hope do as well.

I'm glad you recognize your errors, tymmo. It seems that most involved reading comprehension. Do you need bifocals? <LOL>

intercst


I have made many. I only made it into med school with the reading comprehension...(no bragging here, though

Bifocals aren't needed yet, thanks. And sorry for my incomprehension. I am humble enough to know my limits.

I am gone for the next 2 months in Italy for vacation.

I can't thank everyone enough for this opportunity, without everyone here, it wouldn't be possible. Hopefully, there will be cybercafes to keep everyone posted!


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