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aj485,

You wrote, ... Roth conversions can be withdrawn after they have been in the account for 5 years without paying taxes or penalties. ...

Nit #1: You don't pay additional taxes on conversions, but you may owe the 10% penalty.

Nit #2: Any non-taxable portion of a Roth IRA conversion can be withdrawn penalty free ... but any taxable portion that was also converted in that year has to be withdrawn first. Also since you have to withdraw conversions in order of the contribution year, if you have an earlier taxable conversion already in your Roth IRA you will have to wait for that 5 year clock or pay the penalty.

- Joel
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It's fairly easy to tap your IRA/401k penalty-free before age 59-1/2. And the bonus is that it reduces the size of your Required Minimum Distributions at age 70.

Should I tap my IRA first in retirement?
https://retireearlyhomepage.com/irawithd.html

<snip>


I tapped my IRA starting at age 40 using a SEPP. Then discontinued the distributions at age 59-1/2 to take advantage of the "free Obamacare" available to retired investors who carefully manage their capital gains income and eschew interest income and dividends.

It's amazing how many impressively-credentialed financial planners miss this and end up costing their clients tens or hundreds of thousands of dollars in additional taxes and lost tax credits.

intercst
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I just learned about this "Substantially Equal Periodic Payments" exemption and I had some questions as I think this will enable me to retire early, as in potentially within a few months.

First, is there a special way you have to make these withdrawals or do you just withdraw the money and then report what you did on your annual taxes?

Second, I work for the Federal government so I have the Thrift Savings Plan (TSP) instead of a 401K. does SEPP still apply to the TSP the same way it does to a 401K?

Third, in addition to the TSP I have one Roth IRA and a Rollover IRA. Do I have to take SEPP from all of them each year or just one of them at a time?

Finally, I know we can't take payments until after we stop working, but does that mean if I retire this year (2019) I can take my first payment this year or would I have to wait until after 1 Jan 2020?

Thanks to anyone who knows the answers to these questions. My goal has always been to retire early but most of my money is in my retirement accounts so I thought it was unavailable until age 59.5.
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The rules for the SEPP plan, also known as a 72t, are that you must continue the distribution for the longer of 5 years or to age 59-1/2. If you fail to take the distributions you can be assessed penalties for all previous distributions. Hence, you want fairly stable investments in that plan. Not ones that might crash in value.

The distribution rate is based on your life expectancy and is typically 2 to 3% of the account balance per year. I did mine with Fidelity. Your custodian can give you an estimate of what your plan could pay based on the accounts current value.
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Sure. You can do a SEPP from a TSP.

http://tsp-withdrawal.com/tsp-early-withdrawal-penalty/

SEPP withdrawals are reported on IRS Form 5329. You will be using the exception on Line 2.

https://www.irs.gov/pub/irs-pdf/f5329.pdf

It's possible to do a SEPP from one retirement account while leaving the others intact.

intercst
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Rich
I've assisted many over the years in setting up their SEPP. Brokerages used to help set these up when I was in the FP industry, but from what I'm hearing today, many have discontinued providing assistance in doing the calculations but will set up the separate TIRA and auto withdrawals as the owner instructs.

The SEPP is a minefield of rules that you must follow, depending on which method used in determining the withdrawal amount and the timing of the withdrawals. I wrote an article on how to do this 3 or so years ago at SA that you might find useful.....and hopefully none of the rules have changed.

https://seekingalpha.com/article/3984874-ira-withdrawals-age...

BruceM
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Rich
I've assisted many over the years in setting up their SEPP. Brokerages used to help set these up when I was in the FP industry, but from what I'm hearing today, many have discontinued providing assistance in doing the calculations but will set up the separate TIRA and auto withdrawals as the owner instructs.

The SEPP is a minefield of rules that you must follow, depending on which method used in determining the withdrawal amount and the timing of the withdrawals. I wrote an article on how to do this 3 or so years ago at SA that you might find useful.....and hopefully none of the rules have changed.

https://seekingalpha.com/article/3984874-ira-withdrawals-age......

BruceM


If I'm the "correct" Rich, thanks. I think I'll be ok. I have to stay in my job until next summer due to not wanting to pay back relocation benefits. At that point I'll be 57.5. Most likely I'll keep working until 60 but if not, I have enough in taxable savings to bide me the two years until 59.5 and then at 60 I'll get a pension.

Fortunately I have in demand skills, its just a matter of do I really want to work? In my current (new) job, the answer is no due to the non-interesting work but I'm sure I an manage another 9 months and then look for something more interesting.

And I probably didn't think too much about early withdrawals because I thought there was an exception for government employees that retire at 56 but I might be wrong.

My main priority right now is to sit down with a tax expert and make sure I understand various options for retirement.

Thanks
Rich
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I thought there was an exception for government employees that retire at 56 but I might be wrong.

There's a general rule that allows people to withdraw from an employer sponsored retirement plan without penalty if they separate from service from that employer in or after the year they turn 55. See this article from Dan Caplinger for more details: https://www.fool.com/retirement/401k/2018/02/21/can-i-get-mo...

Regards,
-Chuck
Discovery/HR Home Fool
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And I think Roth accounts if the money has been there 5 years.

Close, but not exactly. Roth 'regular contributions' can be withdrawn without paying taxes or penalties at any time. Roth conversions can be withdrawn after they have been in the account for 5 years without paying taxes or penalties. Withdrawing earnings from a Roth account prior to age 59 1/2 can result in having to pay taxes or penalties unless you qualify for an exception.

For lurkers out there who want to use Roth accounts prior to 59 1/2, there is a 'Roth Conversion Ladder' where, each year for 5 years prior to your retirement, you do a conversion of the amount that you believe that you will need in 5 years, and continue to do those conversions until you hit age 55.

AJ
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And I think Roth accounts if the money has been there 5 years.

Close, but not exactly. Roth 'regular contributions' can be withdrawn without paying taxes or penalties at any time. Roth conversions can be withdrawn after they have been in the account for 5 years without paying taxes or penalties. Withdrawing earnings from a Roth account prior to age 59 1/2 can result in having to pay taxes or penalties unless you qualify for an exception.

For lurkers out there who want to use Roth accounts prior to 59 1/2, there is a 'Roth Conversion Ladder' where, each year for 5 years prior to your retirement, you do a conversion of the amount that you believe that you will need in 5 years, and continue to do those conversions until you hit age 55.

Each year, you can then withdraw, tax and penalty-free, up to the amount that was converted 5 years prior.

AJ
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There's a general rule that allows people to withdraw from an employer sponsored retirement plan without penalty if they separate from service from that employer in or after the year they turn 55

BIG Caveat!!! The employer's plan must also allow this. And the employer's plan MAY require that distributions be taken out in a specific way, like having quarterly withdrawals set up for x number of years. So be sure that your employer's plan will allow you to take withdrawals in the way that you want before you actually retire, if you plan to do this.

AJ
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aj485,

You wrote, ... Roth conversions can be withdrawn after they have been in the account for 5 years without paying taxes or penalties. ...

Nit #1: You don't pay additional taxes on conversions, but you may owe the 10% penalty.

Nit #2: Any non-taxable portion of a Roth IRA conversion can be withdrawn penalty free ... but any taxable portion that was also converted in that year has to be withdrawn first. Also since you have to withdraw conversions in order of the contribution year, if you have an earlier taxable conversion already in your Roth IRA you will have to wait for that 5 year clock or pay the penalty.

- Joel
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aj485

Roth conversions can be withdrawn after they have been in the account for 5 years without paying taxes or penalties. Withdrawing earnings from a Roth account prior to age 59 1/2 can result in having to pay taxes or penalties unless you qualify for an exception.


I am many years over 59 1/2, does the five year rule still apply for each conversion? I do know how much and when I did conversions from my tax records over the last 20 years. If required, how do you specify which conversion is being withdrawn?

Thanks,
JG4
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jg4,

You wrote, I am many years over 59 1/2, does the five year rule still apply for each conversion? I do know how much and when I did conversions from my tax records over the last 20 years. If required, how do you specify which conversion is being withdrawn?

If you are at least 59 1/2 *and* you have had a Roth IRA open and funded for at least 5 tax years, all Roth IRA distributions are considered Qualified. In the case of Qualified distributions, the 5 year rule on conversions does not apply because the ordering rules are only applied to non-qualifying distributions.

So based on your description I'd say any Roth IRA distribution you take will be qualified - even if you take money from a conversion you just did the year before.

- Joel
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I am many years over 59 1/2, does the five year rule still apply for each conversion? I do know how much and when I did conversions from my tax records over the last 20 years. If required, how do you specify which conversion is being withdrawn?

Since you have apparently have had a Roth account in place for at least 5 tax years, and you are over 59 1/2, you meet the criteria for 'qualified distributions' which means that all withdrawals are tax and penalty free. The conversion clock only is triggered if you don't meet criteria for qualified withdrawals.

AJ
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Nit #1: You don't pay additional taxes on conversions, but you may owe the 10% penalty.

If the 5 year clock for the conversion has been met (which was the premise described), then the withdrawal would not be subject to a 10% penalty.

Nit #2: Any non-taxable portion of a Roth IRA conversion can be withdrawn penalty free ... but any taxable portion that was also converted in that year has to be withdrawn first. Also since you have to withdraw conversions in order of the contribution year, if you have an earlier taxable conversion already in your Roth IRA you will have to wait for that 5 year clock or pay the penalty.

If you have an earlier taxable conversion, and you've already met the 5 year clock on the later conversion (as described by "after they have been in the account for 5 years"), then by definition, the time clock for the earlier year would also be satisfied.

You seem to be picking at non-nits.

AJ
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