For most investors, a successful retirement is predicated on the slow, methodical process of investing in a qualified plan, i.e. IRA’s, 401(k)’s and SEP’s. The benefits are many, primarily the ability to contribute pre-tax money and have the investments grow tax-deferred until eventual distribution, generally after age 59 ½. There are some strategies that you may find useful in dealing with these types of plans that have many rules and restrictions.
Recently we had a new client come to us after leaving a Fortune 500 firm, who was not 59 ½, yet wanted to retire and start living off the substantial amount in the 401(k). We suggested rolling the money into a self-directed IRA and begin a 72(T) calculation. This IRS ruling allows investors to withdraw money from their IRA before age 59 ½ and not incur the 10% early withdrawal penalty.
Substantially Equal Periodic Payments
These withdrawals must be taken in what is called a series of Substantially Equal Periodic Payments. Once started, these payments must continue for five years or until the age of 59 ½ is attained, whichever is greater. The withdrawal amount will depend on the calculation method, account balance, and age of the investor.
Another misperception we often encounter is that you are unable to move money from a 401(k) while still working with the company. Many firms now allow for a non-hardship, in-service withdrawal from the plan while still employed. The availability and specifics lie in the plan documents themselves, but we have found that many clients have been able to roll a portion of their 401(k) assets into an IRA while still working.
Tax Efficient Transfer
The disadvantage of this is that you are not able to take a loan from your IRA, unlike a 401(k). The advantage lies in the open universe of investments available in an IRA and the ability to create a much more tax efficient transfer of wealth in an estate plan upon death.
We understand that we have covered some extensive topics in a brief overview, so we welcome your calls to discuss the information conveyed. Please reach out to me or Kyle Clark for further clarification.
Sources: 72(T)-Forbes, Withdrawals-Transamerica.