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I am 51 now, and I plan to retire at 55. I have a
401(k), a regular IRA, and a defined benefit pension plan that I have an option of taking as an annuity or a lump sum at retirement. I have decided to take the lump sum.

I understand that at retirement I will be able to take a full or partial distribution from my 401(k), pay taxes at ordinary income rate, and roll the rest over to my IRA. However, I don't understand the pension part of it. Is the pension considered part of the
401(k)? Does it fall under the same rules? If I take my pension as a lump sum distribution, can I keep part of it and roll the rest over into my IRA?

What are the pros and cons of keeping part of the
401(k) and pension distribution, instead of rolling it all into my IRA, to cover the 4.5 years between 55 and 59.5, in order to avoid the 72(t) reg? Is this a good strategy?

I found Pub 590 on the IRS website and downloaded it. From that, I think I understand the three methods to take take substantially equal distributions from my IRA in order to avoid the 10% penalty. I also read post #3039. However, neither of these addresses the strategies involved.

Is 72(t) on the web somewhere available for download?

Thanks,

Russ
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Greetings, Russ, and welcome. You wrote:

<<I am 51 now, and I plan to retire at 55. I have a 401(k), a regular IRA, and a defined benefit pension plan that I have an option of taking as an annuity or a lump sum at retirement. I have decided to take the lump sum.

I understand that at retirement I will be able to take a full or partial distribution from my 401(k), pay taxes at ordinary income rate, and roll the rest over to my IRA. However, I don't understand the pension part of it. Is the pension considered part of the 401(k)? Does it fall under the same rules? If I take my pension as a lump sum distribution, can I keep part of it and roll the rest over into my IRA?>>


As long as you take your total cash payments from both plans in the same year, they fall under the same distribution rules. You may keep part, pay taxes on that amount, and roll the rest to an IRA. Because you will be at least age 55 when you take that distribution, the part you keep will not be penalized for an early withdrawal. The magic age for no-penalty withdrawals from a qualified retirement plan is 55, unlike an IRA, which is 59 1/2..

<<What are the pros and cons of keeping part of the 401(k) and pension distribution, instead of rolling it all into my IRA, to cover the 4.5 years between 55 and 59.5, in order to avoid the 72(t) reg? Is this a good strategy?>>

It could be, but that depends on the effect of taxes on the part of the lump sum payments you keep to live on for that period. You will literally have to run the numbers. The advantage is you can keep as much as you want without having to worry about an early withdrawal penalty or taking "substantially equal periodic payments" for at least five years. The disadvantage is you may incur a heavy tax burden.

<<I found Pub 590 on the IRS website and downloaded it. From that, I think I understand the three methods to take take substantially equal distributions from my IRA in order to avoid the 10% penalty. I also read post #3039. However, neither of these addresses the strategies involved.

Is 72(t) on the web somewhere available for download?>>


Well, you've already read what I consider the best explanation of 72(t) withdrawals on the web. Of course that has absolutely nothing to do with the fact I wrote it, does it? :-) You might be able to find the actual Section of the Infernal (sic) Revenue Code itself at the IRS website (www.irs.gov ), but I don't think you'll find it of very much use. IMHO, when the time comes, you will be far better off going to a fee-only Certified Financial Planner skilled in retirement planning issues such as this. That person for a very modest fee can run a number of scenarios for you. Believe me when I say it will be mney well-spent. Don't be penny-wise and pound-foolish here. Mistakes can be very, very costly. It just ain't worth it to try and save a couple hundred in this kind of situation.

Regards…Pixy
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. IMHO, when the time comes, you will be far better off going to a fee-only Certified Financial Planner skilled in retirement planning issues such as this. That person for a very modest fee can run a number of scenarios for you. Believe me when I say it will be mney well-spent. Don't be penny-wise and pound-foolish here. Mistakes can be very, very costly. It just ain't worth it to try and save a couple hundred in this kind of situation.

Pixy,

Thanks for your comments. I agree with you 100%, and my first move in 1999 is to meet with a fee only planner. In fact I intend to meet with a fee only planner once a year until I retire, just to make sure I don't make any serious errors.

BTW, I've read a fair number of your responses, and I have to compliment you for being very patient with all the beginners, and providing very informed and useful information. You are really helping out a lot of people.

Merry Christmas,

Russ
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Russ writes:

<<Thanks for your comments. I agree with you 100%, and my first move in 1999 is to meet with a fee only planner. In fact I intend to meet with a fee only planner once a year until I retire, just to make sure I don't make any serious errors.

BTW, I've read a fair number of your responses, and I have to compliment you for being very patient with all the beginners, and providing very informed and useful information. You are really helping out a lot of people.

Merry Christmas,>>


I'm glad that's your decision. IMHO you will be well-served by doing that planning well in advance of the actual event.

Thanks for your compliments. We all have to begin somewhere, and making it easier for someone to do so is what Fooldom is all about.

And right back atcha on the Merry Christmas.

Regards....Pixy
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I'm in a similar situation to Russ's, albeit a few years behind.

Anyway, here's the plan: I'm 57 1/2+, with a healthy IRA, a defined benefit plan, FICA, and some odd small annuities that kick in at 65 (One of them is something like $9/mo. Whoopee.) I'm looking at tapping the IRA for 5 years under 72(t) (3rd option - I forget the terminology) which will get me to 62 1/2, then add the retirement plan and SS, then the annuities at 65. Kind of a reverse laddering strategy.

As I read 72(t), after 5 years I can recompute the IRA withdrawal rate, (probably lowering it) and pretty much withdraw whatever I like (the IRA isn't healthy enough to worry about minimum withdrawals). In addition, I can withdraw whatever I like for education (I'm going back to school.) Is this correct?

Finally, does anyone have a copy of IRS Notice 89-25, wherein the secrets of computing the distributions are revealed? I've found the UP-1984 Mortality Table (only the IRS could involve Uruguay in this business) but I also need the exact computation rules, which Pub 590 says are in Notice 89-25. With all due respect to the cautions given here, if I use the government tables and the government formulas, I've got enough faith in my basic arithmetic skills to have a go at it myself. I also have no faith in Wise advisors, based on their wretched record in handling my affairs over the years -- if only I'd had this board and Pixy 35 years ago...
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The Othermfa writes:

<<Anyway, here's the plan: I'm 57 1/2+, with a healthy IRA, a defined benefit plan, FICA, and some odd small annuities that kick in at 65 (One of them is something like $9/mo. Whoopee.) I'm looking at tapping the IRA for 5 years under 72(t) (3rd option - I forget the terminology) which will get me to 62 1/2, then add the retirement plan and SS, then the annuities at 65. Kind of a reverse laddering strategy.

As I read 72(t), after 5 years I can recompute the IRA withdrawal rate, (probably lowering it) and pretty much withdraw whatever I like (the IRA isn't healthy enough to worry about minimum withdrawals). In addition, I can withdraw whatever I like for education (I'm going back to school.) Is this correct?>>


Based on your starting age of 57 1/2, you must continue 72(t) distributions for five years. After you have taken the fifth annual distribution, you may take how much you want as often as you want until you reach age 70 1/2. At age 70 1/2 you must begin the mandatory withdrawal schedule based on your age.

You may not take an "extra" distribution for educational purposes. All you avoid with that is the 10% early withdrawal penalty. It's still a taxable distribution. The early withdrawal penalty is already avoided when you use 72(t), which is also a taxable distribution. If you take more money out than is authorized via the 72(t) calculation, then you have violated the 72(t) rules. That means anything not used for education expenses will be penalized. This is a case wherein you can't have your cake and eat it, too.

<<Finally, does anyone have a copy of IRS Notice 89-25, wherein the secrets of computing the distributions are revealed?>>

The IRS says, " Notice 89-25 is printed in Internal Revenue Cumulative Bulletin 1989-1, which is available at most IRS offices and some libraries." You might try a good reference library. But if you come across one on-line, lemme know. I'd like a personal copy as well. :-

Regards….Pixy
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Dear Pixy -

In posting 7477 your wrote: " The magic age for no-penalty withdrawals from a qualified
retirement plan is 55, unlike an IRA, which is 59 1/2.."

My company has a 401K program with MASS Mutual and they are apparently not aware of this - or so they have led our local plan administrator to believe. Is there a section of the Infernal Revenue Code you can direct me to on the issue?

Regards,

H. C. Burger
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H. C. Burger writes:

<<In posting 7477 your wrote: " The magic age for no-penalty withdrawals from a qualified retirement plan is 55, unlike an IRA, which is 59 1/2.."

My company has a 401K program with MASS Mutual and they are apparently not aware of this - or so they have led our local plan administrator to believe. Is there a section of the Infernal Revenue Code you can direct me to on the issue?>>


Tell them to look at Section 72(t)(2)(A)(v), IRC, which says the 10% penalty for early withdrawal does not apply to a plan distribution "...made to an employee after separation from service after attainment of age 55..."

There are two key factors here. The employee must actually leave the job and be age 55 or older. Be aware, though, that while a penalty-free distribution is allowed, the plan does not have to make one until the employee reaches the age of "normal retirement". Most allow it, but a significant number don't. The latter make the employee wait until a later age like 60, 62 or 65.

Regards…..Pixy


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