Early Withdrawl

Dip into your 401(k) funds penalty-free

life expectancy is 30 years, for example, you’d calculate 1/30 th of your plan balance and withdraw that much each year. Alternatively, you can name a beneficiary and withdraw an amount based on a longer joint life expectancy.

With amortization, you calculate that your initial plan balance will grow by a “reasonable” rate. “The IRS has indicated that you can assume an interest rate that’s 120% of the current mid-term federal rate,” says Brennan. “In today’s environment, that might mean a rate of 6% or 7% or so. You can assume a higher rate if you can justify your expectation that the plan will grow by that amount.” The higher the assumed rate, the greater the penalty-free withdrawals you’re permitted. This tech-nique permits much higher withdrawals than the life expectancy method.

As for annuitization, this is a more complicated calcula-tion, incorporating annuity factors and present values. The end result: you can withdraw a bit more with this method than with the amortization method, depending on the circumstances.

What can you make of all this data? The use of the methods vary, so you can arrive at different numbers. If you need to take money from a retirement plan before age 591/2, calculate the amount that you’ll need for living expenses. Don’t forget to factor in the income tax you’ll have to pay on withdrawals. Try to withdraw as little as possible in order to keep the balance growing, tax-deferred, to finance your retirement.

Once you have a figure for your desired stream of withdrawals, contact the bank, brokerage firm or mutual fund company that acts as the plan custodian. The custodian will assist in making the calculations and determine the method you should use to arrive at the chosen amount.

It is possible to split your IRA. Suppose, in the above example, you had a $150,000 IRA and you wanted to withdraw $750 per month. Using the life expectancy method would provide $378 per month (not enough), while using the annuitization method would provide $1,125 per month (too much).

In this case, you could break up your $150,000 IRA into a $100,000 IRA and a $50,000 IRA; then you could take distributions from the $100,000 IRA, pulling out a “just-right” Goldilocks figure of $750 per month from that account. The other $50,000 IRA can remain untouched to continue its tax-free buildup.

If you decide to receive periodic payments, keep in mind the five-year/591/2 requirement. “My client started to take these payments at age 51,” says Peace,
“so she’ll have to keep up the withdrawal schedule until she reaches 591/2 . Someone else, who starts at 58, would have to keep on the schedule until age 63.”

Once you reach the appropriate mile-post, 591/2 or have satisfied the five-year window, you can withdraw as little or as much as you want, penalty-free. However, a new set of minimum distribution rules kicks in after age 701/2.

What happens if you don’t maintain the 72(t) payment method for five years or until age 591/2 , whichever comes later? You’ll owe the

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