Anybody know the rules/restrictions that might be imposed on use of 401K money prior to 59 1/2 even though you are retired?? I am 57 1/2 and considering retiring however need to use 401K money to do so. Need some advise in this area. Thanks Crawf
If you draw on the 401k then you can start at 55 without penalty. If you convert to an IRA then you have to wait until 59.5 to draw without penalty. Either way you get to pay taxes at ordibnaryu icome rates. Joe Varga
vargaj said:<<If you draw on the 401k then you can start at 55 without penalty. If you convert to an IRA then you have to wait until 59.5 to draw without penalty. Either way you get to pay taxes at ordibnaryu icome rates. >>Not necessarily so, from what I know. I'm sure Pixy or Badger will straighten us out, but you could: 1) retire 2) convert the 401(k) balance to a self-directed IRA [or more than one] 3) Begin drawing from one [or more] IRAs using substantially equal annual withdrawals following the approved IRS method.
Downward Spiral: You are right and I did not discuss all the options available from a IRA. My point only was that directly from a 401k on can draw without penalty starting at 55 AND without meeting any "substantially equal payments" requirement. It seems like this is overlooked in the conversion from 401k to an IRA. It seems like most of the focus is on the advantages of a self directed IRA, but if you need the money to get from 55 to 59.5, you would be better drawing directly form the 401k and it has the additional advantage that you don't have to consider the value or basis in your IRAs when doing the taxes.Joe Varga
Greetings, Crawf, and welcome. You asked:<<Anybody know the rules/restrictions that might be imposed on use of 401K money prior to 59 1/2 even though you are retired?? I am 57 1/2 and considering retiring however need to use 401K money to do so.Need some advise in this area.>>As Joe Varga mentioned, the magic age is 55 for taking money without penalty directly from a retirement plan like a 401k. Thus, as long as you retire and leave the money in the plan, anything you withdraw will be subject only to ordinary income taxes.OTOH, if you transfer those monies to an IRA, then you fall under IRA rules. That means that you can't touch the money without penalty until age 59 1/2 unless you use "substantially equal periodic payments" as prescribed in Section 72t of the Infernal (sic) Revenue Code. For an overview of those rules, see the post on this board at http://boards.fool.com/Registered/Message.asp?id=1040013000805003&sort=postdate . If your plan won't let you leave the money there, you could possibly withdraw enough to live on for two years (paying the taxes in one year), and roll the rest to an IRA to continue the tax deferral. That way you could avoid the 5-year minimum withdrawal schedule from an IRA imposed by the 72t rules.Regards..Pixy
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