I was considering the divorce/remarry employer scenario, but now after reading pp323-325 of The Motley Fool's Investment Tax Guide 2000 I'm confused. In the Tax Strategy box it mentions a guy that quits at age 54 then waits to 55 to get his 401k money without penalty...if he rolled his 401k into an IRA he wouldn't be able to touch it til 59 1/2...p323. On p325, end of 2nd paragraph it says if you quit after 55 you can withdraw 401k funds without penalty. Which is it? My 401k plan doesn't allow for partial withdrawals, so if I didn't roll it into an IRA I'd be taxed on the whole amount...OUCH! Is there a way to be able to use the funds without penalty at age 55 and to only be taxed on the amount I use and to have the ability to invest the rest in a broker account? Thanks, Spirit
Lets distinguish between the income tax you pay on 401K or IRA distributions and the penalty. You may take penalty free distributions from a 401K if you leave the company after age 55. That means you do not pay the 10% penalty. It does not mean you do not have to pay income taxes on the amount distributed.If you roll it over into an IRA or if you leave your employer before age 55, you cannot take penalty free distributions before age 59-1/2. However, you can set up an SEPP distribution plan in either which pays a fractional amount per year based on your life expectancy.If you take the whole distribution from a 401K at age 55 in a lump sum, you can reduce the tax bite somewhat using a Charitable Remainder Trust (or apparently a Charitable Remainder Partnership) as recently discussed on the Foolish Estate Planning board.Only after 59-1/2 in an IRA can you control your distributions so that only sums you need will be taxable. But by that time, you don't have a lot of time before forced distributions at 70-1/2 will make you pay the income tax.Another approach is partial conversions of IRA to Roth IRA in a way that minimizes the taxes on conversion and then avoids the taxes on Roth Distributions.Its a complex issue. If your accounts are large, you may want to consult a financial planner or an estate attorney for assistance.
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