Author Topic: 72t exception for 401k withdrawals  (Read 3209 times)

38 and out

  • Stubble
  • *
  • Posts: 3
72t exception for 401k withdrawals
« on: March 13, 2013, 03:59:17 PM »
First time poster, long time stalker.

I'm newly retired in late 2012. The majority of my assets are tied up in my 401k, Roth IRA and rental homes (which provide for the majority of my living expenses similar to MMM). I'm considering taking equal payments for life from my 401k to cover the remainder of my living expenses instead of pulling the contributions from my ROTH IRA.

Who else has gone this route?  Did you file your own taxes and if so are any special forms required to disclose this to the IRS?  First I'm debating if I'll later regret drawing on my 401k for some reason and secondly I'm trying to decide if I should have a pro do my taxes even though I'm an accountant by trade and could probably handle it.  Given I'm new to landlording in 2012 as well I figured it may be best to pay someone well to do my taxes right this year and then do them on my own down the road. 

Any thoughts would be appreciated.

spoonman

  • Senior Mustachian
  • *****
  • Posts: 966
  • Location: Los Angeles
Re: 72t exception for 401k withdrawals
« Reply #1 on: March 13, 2013, 07:04:48 PM »
Congratulations on reaching retirement!  If I interpret your name right, you retired at 38 years of age...is that right?  If so, awesome!

I don't have any solid advice for you since I haven't reached FI yet, but I'm thinking of doing a Substantially Equal Periodic Payment (SEPP) with my 401k money, which I plan to roll over to an IRA. 

The one thing I will warn you about is that SEPPs can be limited by current interest rates, which are abismally low right now.  You may want to wait a bit until interest rates rise, unles you would be satisfied with low payments.

I am very interested to hear what the rest of the community has to say about this.

Congrats again!

38 and out

  • Stubble
  • *
  • Posts: 3
Re: 72t exception for 401k withdrawals
« Reply #2 on: March 13, 2013, 09:53:59 PM »
I'm looking to use the method that allows me to draw the least amount of out my 401k yearly as possible.  According to my calculations I'd be able to draw about $6,000 per year without having to pay a penalty, which is the perfect amount to solve my liquidity issues.

Yes thanks I'm retired at 38 or I guess FI at 38 with a SWR of less than 4% now and about 3% when I pull my kids out of daycare for good.

Mike

  • Bristles
  • **
  • Posts: 97
  • Location: Eagan, MN
Re: 72t exception for 401k withdrawals
« Reply #3 on: March 14, 2013, 02:41:49 AM »
If you're going to go the 72t route, it's probably a good idea to hire a tax professional.  If you eff up the calculation at any point in the process (whether it be year one or year fifteen), the IRS will assess penalties for every year of the 72t payments.  If you're pocketing $6,000 annually for 20 years and then they determine you screwed up, you'll owe 10% early withdrawal penalties on $120,000 worth of disbursements.  Not good.

38 and out

  • Stubble
  • *
  • Posts: 3
Re: 72t exception for 401k withdrawals
« Reply #4 on: March 14, 2013, 11:32:19 AM »
Thanks for the reply Mike.  I'm leaning toward going with the tax pro as well. The landlording entry in 2012 also is making doing them on my own even more unlikely. 

clutchy

  • Handlebar
  • ***
  • Posts: 242
Re: 72t exception for 401k withdrawals
« Reply #5 on: March 17, 2013, 11:52:51 AM »
Call up your 401k or IRA provider and let them know what you're doing.

they'll send you a yearly 1099-R for tax reporting purposes.