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I have to admit the language for the IRA's confuses me a little, so I was hoping that someone could explain it.

It's my understanding that 401k's, Roth IRA's, traditional IRA's, etc can generally only be touched once the person is of retirement age (59.5).

However, if someone wished to withdraw penalty free, they could take "substantially equal payments" for the life of the holder/beneficiary, and the payments must last 5 years or until age 59.5.

So here's my question. I was originally planning on sending a lot of funds into taxable accounts, since in theory my wife and I would like to retire early (still in planning stages). The theory was that we really couldn't touch our 401k's, roth, etc until we were 59.5, and if we wanted to retire at 50, we would need substantial taxed funds to be able to afford it.

Could we start up substantially equal payments on a single IRA account? Between my wife and I, we have 2 401k's and 2 roths. Could we start up substantial withdrawls from a 401k account, leaving the other 3 IRA accounts to grow? In that way we wouldn't need to have such a large taxable amount since we could be touching our retirement funds without penalty?

What am I missing here, how am I misunderstanding this?
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Cebron, you are doing fine. Those substantially equal payments plans are often called 72(t) distributions in the world of TMF, but you will find much more information on them in the IRS Publication on IRA Accounts. I think its Publication 590. Its available on line in Adobe format from the site. The IRS calls them annuity distributions.

Yes, if you have multiple accounts, you can do a 72t on each one individually whenever you want to. The distributions you can take are calculated by one of several formulas that are intended to last for your lifetime. Hence, the allowed amount can be quite low. But yes distributions tax free are very possible.

Most custodians will be willing to prepare estimates of what those distributions will be. All you have to do is ask.

Although the law allows you to do a 72t from any or all of the account types you mention, in my experience they are easiest from an IRA. 401K custodians often want you to do a rollover to an IRA before beginning the distribution.

And remember you must continue for at least 5 years once the distribution is begun. So if the account is invested in high flying stocks and they collapse during that five years so you cannot make the payment, you have a big problem. In that case, a pro like a CPA can help you out, but otherwise, you can be charged penalties on all your previous distributions. So its best to make those distributions conservative rather than right up to the limit and to invest the accounts being tapped in a moderately conservative fashion.

Oh, by the way, your 401K can be tapped penalty free at age 55 if you leave the company after age 55. That is one minor detail you missed in your summary.

Fool on!!
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Hello Ceberon:

Most of your post is actually correct. Substantially equal periodic payments, or §72(t) distributions are actually easy to compute, but are difficult to plan effectively & there are lots fo options & rules.

I suggest you visit; there si lots of good information there.

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However, if I understand correctly, you can withdraw your contributions to the Roths at any time, any age, free of penalty. It's only the earnings on the contributions that have to wait.

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