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Author: MDGrabhorn Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19224  
Subject: Re: taking early withdrawl from pension Date: 7/11/2001 9:26 AM
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>>I am looking for info on an exception the IRS has made to the 10% on early withdrawl on your pension. It is called the Series of Substantially Equal Payments. My husband plans on retiring this coming January and will only be 55 so we need to supplement our income and would like to do it without the 10% penalty. We had heard about this but so far I haven't found out much info on it. <<

The information is readily available on the Fool site at http://www.fool.com/retirement/manageretirement/manageretirement9.htm.

First though, are you going to receive the distribution from a pension plan as a monthly benefit for life? Or, are you taking a lump sum rollover to an IRA?

If you are receiving the monthly pension, you don't have to worry about the 10% penalty. It will not apply due to the nature of the distribution.

However, if you are receiving the income from the IRA, then the 10% penalty is applicable.

Very simply, to avoid the 10% penalty (you still owe tax on the distribution as ordinary income) you must receive the distributions according to a fixed schedule for the LONGER of 5 years or age 59 1/2. If you violate the schedule, by stopping payments or by accelerating payments, then the IRS will disqualify your 72(t) distributions and apply the 10% penalty retroactively, plus interest.

That said, a 72(t) distribution can be an effective way to tap into an IRA for income and avoid the 10% penalty. To maximize flexability and to avoid the retroactive penalty, a common tactic is to NOT put 100% of your lump sum into the same IRA. Instead, split the distribution into at least 2 IRA's, with different trustees (just to be conservative). Then you set-up the 72(t) distribution from only 1 of the IRA accounts.

Now, if you suddenly need $5,000 for whatever reason, you draw that from the other IRA(s) not currently set-up under a 72(t). Of course, the $5,000 in this example will be subject to a 10% penalty if you are younger than 59 1/2, but it wont disqualify your previous 72(t) distributions. Make sense?

Anyway, read the Fool article. Most of the large IRA custodians should be able to assist with setting up the withdrawal schedule.

Good luck to you.

MDGrabhorn, CFP
www.pensionrecovery.com
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