Author Topic: How to withdraw funds from your IRA and 401k without penalty before age 59.5  (Read 67237 times)

johnny847

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #50 on: September 16, 2015, 03:55:00 PM »
We are trying to get the answer directly from Megacorp, but they are being slippery, so I thought I'd ask here.

If you declare yourself retired in the year you turn 55 (or later), can you still take penalty-free withdrawals from your 401k if you are then hired back as a contractor by the same company? Or does it have to be a full and complete severing of the employer/employee relationship?

I unfortunately do not know the answer to your question.

However, I would like to say that I wouldn't necessarily trust what the Megacorp tells you. At the end of the day, you're the one who's going to be on the hook for any possible tax penalties of these withdrawals. Not them. They don't have a vested interest in giving you the correct answer.

googily

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #51 on: September 16, 2015, 03:57:18 PM »
We are trying to get the answer directly from Megacorp, but they are being slippery, so I thought I'd ask here.

If you declare yourself retired in the year you turn 55 (or later), can you still take penalty-free withdrawals from your 401k if you are then hired back as a contractor by the same company? Or does it have to be a full and complete severing of the employer/employee relationship?

I unfortunately do not know the answer to your question.

However, I would like to say that I wouldn't necessarily trust what the Megacorp tells you. At the end of the day, you're the one who's going to be on the hook for any possible tax penalties of these withdrawals. Not them. They don't have a vested interest in giving you the correct answer.

Yes, we'll also be asking our tax adviser and perhaps also a financial adviser. But we were hoping someone here may have some experience, until we get to those people with the question.



MDM

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #52 on: September 16, 2015, 07:10:01 PM »
If you declare yourself retired in the year you turn 55 (or later), can you still take penalty-free withdrawals from your 401k if you are then hired back as a contractor by the same company? Or does it have to be a full and complete severing of the employer/employee relationship?
The answer is in your question: a contractor is not an employee.

See www.401khelpcenter.com/401k_education/Early_Dist_Options.html and https://www.expertplan.com/articles/a022001.jsp, among others, for more.

googily

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #53 on: September 17, 2015, 08:15:07 AM »
If you declare yourself retired in the year you turn 55 (or later), can you still take penalty-free withdrawals from your 401k if you are then hired back as a contractor by the same company? Or does it have to be a full and complete severing of the employer/employee relationship?
The answer is in your question: a contractor is not an employee.

See www.401khelpcenter.com/401k_education/Early_Dist_Options.html and https://www.expertplan.com/articles/a022001.jsp, among others, for more.

Thanks, though my sense in doing some reading is that the employee/contractor line is not so cut-and-dry, that it's not good enough to just say "that person is a contractor". I did find this:

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee


MDM

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #54 on: September 17, 2015, 09:28:01 AM »
Thanks, though my sense in doing some reading is that the employee/contractor line is not so cut-and-dry, that it's not good enough to just say "that person is a contractor".
Actually it is, unless someone (that person, the IRS, etc.) challenges the statement and wins in court.  There is a large financial incentive for Megacorp to keep a distinction between its employees and contractors, and Megacorp likely has plenty of lawyers who have developed policies accordingly.

seattlecyclone

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #55 on: September 17, 2015, 09:45:34 AM »
My understanding is that if they're reporting your income on a 1099, you're paying self-employment tax on this money, etc., the presumption is that you're a not an employee of that company. If you wish to rebut this presumption (as some Uber drivers are doing), you can file a lawsuit to that effect, showing that you meet the definition of an employee in certain ways and should therefore be entitled to the protection of various laws that apply to the employer/employee relationship. If you and the company are both happy enough considering you a contractor, I don't think the IRS has any tendency to try and prove you aren't.
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googily

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #56 on: September 17, 2015, 09:52:25 AM »
My understanding is that if they're reporting your income on a 1099, you're paying self-employment tax on this money, etc., the presumption is that you're a not an employee of that company. If you wish to rebut this presumption (as some Uber drivers are doing), you can file a lawsuit to that effect, showing that you meet the definition of an employee in certain ways and should therefore be entitled to the protection of various laws that apply to the employer/employee relationship. If you and the company are both happy enough considering you a contractor, I don't think the IRS has any tendency to try and prove you aren't.

Thanks for this. Onward!

Cathy

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #57 on: September 17, 2015, 10:02:13 AM »
...If you wish to rebut this presumption (as some Uber drivers are doing), you can file a lawsuit to that effect, showing that you meet the definition of an employee in certain ways and should therefore be entitled to the protection of various laws that apply to the employer/employee relationship....

The Uber lawsuit discussed in the popular news media was a proceeding before a California state tribunal. It did not involve the IRS. The IRS (or more accurately, the United States) isn't bound by any state determinations of employee status unless the United States had the opportunity to litigate the issue in the state proceedings, among other requirements. See, e.g., HI-Q Personnel, Inc. v. Commissioner, 132 TC No 13 (1999), slip op at 16 ("a party may invoke [collateral estoppel] only against parties to the first case or those in privity with them").


My understanding is that if they're reporting your income on a 1099, you're paying self-employment tax on this money, etc., the presumption is that you're a not an employee of that company...

I'm not aware of any authority suggesting that the fact that a taxpayer has taken a particular position on a tax form creates any special presumption against the Unites States when it seeks to take a position inconsistent with that tax form. In fact, it's usually the opposite. The burden of proof is usually on the taxpayer, subject to a few exceptions.
« Last Edit: September 17, 2015, 10:27:40 AM by Cathy »
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seattlecyclone

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #58 on: September 17, 2015, 11:32:40 AM »
The Uber lawsuit discussed in the popular news media was a proceeding before a California state tribunal.

There's also a class-action lawsuit in federal court over this issue that was recently granted class certification by the trial judge.


I'm not aware of any authority suggesting that the fact that a taxpayer has taken a particular position on a tax form creates any special presumption against the Unites States when it seeks to take a position inconsistent with that tax form. In fact, it's usually the opposite. The burden of proof is usually on the taxpayer, subject to a few exceptions.

I'm sure you're technically correct, as always. If you were hauled in front of a tax court and accused of representing yourself as a contractor when there's some reason to believe you might actually be an employee, you would have to present evidence that you're actually a contractor.

However in the real world the IRS would have little reason to initiate such proceedings. If the company files 1099s and you file the relevant self-employment tax returns, why would they bother with trying to challenge that? Everyone is acting in good faith, the numbers on the tax returns pass the computer checks, everyone's happy.
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The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

Cathy

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #59 on: September 17, 2015, 12:12:45 PM »
There's also a class-action lawsuit in federal court over this issue that was recently granted class certification by the trial judge.

From the news article, it sounds like the United States may not be involved in this proceeding either. That said, the substantive point I was making there was that collateral rulings outside of the tax context are not always usable by you against the IRS in tax proceedings.


I'm sure you're technically correct, as always. If you were hauled in front of a tax court and accused of representing yourself as a contractor when there's some reason to believe you might actually be an employee, you would have to present evidence that you're actually a contractor.

However in the real world the IRS would have little reason to initiate such proceedings. If the company files 1099s and you file the relevant self-employment tax returns, why would they bother with trying to challenge that? Everyone is acting in good faith, the numbers on the tax returns pass the computer checks, everyone's happy.

I'm sorry if it came across that I was engaging in pedantry. However, I was making a real, significant point. I just didn't really spell it out. Let me spell it out now.

The problem I have with the above quoted message is that it is basically inviting forum members to engage in fraud. But let's back up a bit to see why that is.

Back in reply #49, user "googily" asked a question about an exception to the 10% additional tax for certain distributions from a qualified retirement plan. This is a question about a statute and as such, the answer should begin by looking at the statute. The statute tells us that the 10% additional tax does not apply to "distributions which are ... made to an employee after separation from service after attainment of age 55". 26 USC 72(t)(2)(A)(v). User "googily" asks whether he or she can satisfy this requirement by (i) dummying up some paperwork that says that she or he has separated from service, (ii) taking some distributions without paying the 10% additional tax, and then (iii) actually continuing to work for the company presumably in the same capacity as before, supposedly as a "contractor".

The problem here is that the statute is concerned with whether "googily" actually separated from service, not with whether the employer has dummied up some paperwork that says she or he separated from service. This is a question of mixed fact and law but it is going to turn on whether "googily" substantively, really, actually separated from service. The fact that he or she has some paperwork that says she or he separated from service, when in fact he or she actually did not separate from service, is not going to be decisive.

It's bad advice to say that compliance with the statute is governed chiefly by what the paperwork says, because that is wrong. But of course, that's not exactly what you said; rather, you said you should just take your chances because the IRS probably won't audit it. First of all, I'm not sure what you are basing that on. I don't have any special access to what flags trigger an IRS audit, so I'm only speculating, but it wouldn't be hard to detect something suspicious if a company was filing Forms W-2 for an employee and then suddenly they start filing Forms 1099 instead and the employee is also taking distributions from a qualified retirement plan in apparent reliance on 26 USC 72(t)(2)(A)(v). I don't know whether the IRS has a trigger for that in their audit algorithms, but it wouldn't be difficult to have one.

But let's suppose the IRS is actually unlikely to audit it. We still shouldn't be telling people to take advantage of that, because it's like saying "go ahead and engage in fraud -- you probably won't be caught!". What matters is whether the position has merit, not whether the person is likely to be caught. Taking dubious positions because you won't be caught is just leaving the rest of the US taxpayers to make up the slack for you. If you have a problem with US tax law, the solution is to persuade Congress to amend the statute, not to take rogue tax positions assuming that you won't be caught.
« Last Edit: September 17, 2015, 12:21:12 PM by Cathy »
This post contains only general information on the issues raised by this topic. This post does not provide help tailored to your specific situation. There are many facts that could be relevant to your specific situation and I am not in possession of those facts. If you need help tailored to your specific situation, you should retain an appropriate professional and not rely on this post.

googily

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #60 on: September 17, 2015, 12:25:21 PM »
I'm sorry if it came across that I was engaging in pedantry. However, I was making a real, significant point. I just didn't really spell it out. Let me spell it out now.

The problem I have with the above quoted message is that it is basically inviting forum members to engage in fraud. But let's back up a bit to see why that is.

Back in reply #49, user "googily" asked a question about an exception to the 10% additional tax for certain distributions from a qualified retirement plan. This is a question about a statute and as such, the answer should begin by looking at the statute. The statute tells us that the 10% additional tax does not apply to "distributions which are ... made to an employee after separation from service after attainment of age 55". 26 USC 72(t)(2)(A)(v). User "googily" asks whether he or she can satisfy this requirement by (i) dummying up some paperwork that says that she or he has separated from service, (ii) taking some distributions without paying the 10% additional tax, and then (iii) actually continuing to work for the company presumably in the same capacity as before, supposedly as a "contractor".

The problem here is that the statute is concerned with whether "googily" actually separated from service, not with whether the employer has dummied up some paperwork that says she or he separated from service. This is a question of mixed fact and law but it is going to turn on whether "googily" substantively, really, actually separated from service. The fact that he or she has some paperwork that says she or he separated from service, when in fact he or she actually did not separate from service, is not going to be decisive.

I'm very interested in this, but let's be careful about the phrase "dummying" up. This would be (and it's not me, BTW), the end of health insurance, full-time hours, and presumably all other employee benefits. Along with quite possibly long stretches of time where no work is done for the company.

Not just suddenly calling the job a contract job and nothing else changing.


Cheddar Stacker

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #61 on: September 17, 2015, 01:21:40 PM »
I'm very interested in this, but let's be careful about the phrase "dummying" up. This would be (and it's not me, BTW), the end of health insurance, full-time hours, and presumably all other employee benefits. Along with quite possibly long stretches of time where no work is done for the company.

Not just suddenly calling the job a contract job and nothing else changing.

Maybe stating the obvious here, but ....... don't perform any contract work. You will be 55. You are only a few years away from drawing social security. You have a (likely large) 401K to draw down.

Why take the chance of possibly paying a 10% penalty when you could just stop?
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googily

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #62 on: September 17, 2015, 01:25:50 PM »
I'm very interested in this, but let's be careful about the phrase "dummying" up. This would be (and it's not me, BTW), the end of health insurance, full-time hours, and presumably all other employee benefits. Along with quite possibly long stretches of time where no work is done for the company.

Not just suddenly calling the job a contract job and nothing else changing.

Maybe stating the obvious here, but ....... don't perform any contract work. You will be 55. You are only a few years away from drawing social security. You have a (likely large) 401K to draw down.

Why take the chance of possibly paying a 10% penalty when you could just stop?

This is an option down the ladder (behind just continuing to work beyond 55, or working part-time and using existing non-retirement-account money as needed until either stopping work or getting to 59 1/2). Just trying to research all options, especially given how fond this particular Megacorp is of giving contracts to people who they've also given early retirement severance packages to.

DH likes his work, he just wants a whole lot more flexibility and time off as he downshifts toward retirement, and knows that a contract deal could be one of the options offered.


frugalnacho

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I posted this same question to Nords today.  Apparently he and his wife are in the middle of doing precisely this and he wrote a blog post with lots of details. It's starting to make more sense.

http://the-military-guide.com/2015/08/06/how-and-why-to-transfer-your-tsp-to-an-ira/

Follow-up question regarding the Roth conversion ladder.  The amount "converted" is available for withdrawal 5 years later.  Is that in the same Roth IRA account that I've had forever? If so, how does the system distinguish funds that have always been there versus the converted funds?

That's not exactly correct.  It's 5 years from the beginning of the year you convert it, so really some where between 4 years 1 day and 5 years.

The 5 year rule starts counting the beginning of the tax year you convert it, so it doesn't actually have to "season" for 5 years.

For example if you convert some money from your traditional IRA to your ROTH IRA on December 31, 2015 you can take that contribution out penalty free on January 1, 2020 which is only 4 years and 1 day.

thrifted

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this is incredibly helpful.  thank you so much!

bacchi

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The 72t SEPP method can be changed once, if it's to the RMD.

"Rev. Rul. 2002-62 permits a one-time change from either the amortization method or the annuitization method to the required minimum distribution method."

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments#8


Also, Q: There is a detailed discussion about the Roth conversion ladder that I can't find. It actually discussed the various forms and where to put the numbers on the 1040. Does anyone have that bookmarked?
« Last Edit: October 07, 2015, 12:27:20 PM by bacchi »

Spork

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I have a question on the Traditional->Roth laddering post age 59.5.   Can I continue to ladder after 59.5?  Is there a required end where laddering is not available?  (Or maybe: laddering becomes impractical at 70.5 when RMDs kick in and make the matter moot?)

I am also assuming the goal here is to convert exactly the amount (or "at least the amount") taxed at 0%.  For example, in 2015 with no other income that might be $12,600 (standard deduction) + $8000 (2 personal exemptions) + $6,650 (deduction for max HSA contribution) = $27,250.   Correct?
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Cheddar Stacker

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I have a question on the Traditional->Roth laddering post age 59.5.   Can I continue to ladder after 59.5?  Is there a required end where laddering is not available?  (Or maybe: laddering becomes impractical at 70.5 when RMDs kick in and make the matter moot?)

I am also assuming the goal here is to convert exactly the amount (or "at least the amount") taxed at 0%.  For example, in 2015 with no other income that might be $12,600 (standard deduction) + $8000 (2 personal exemptions) + $6,650 (deduction for max HSA contribution) = $27,250.   Correct?

It can continue beyond 59.5. Not sure about 70.5 but I don't see why not. Your assumptions are correct. I would say "at least the amount" because in order to convert a large T.IRA you may need to pay some tax over time. You might have to pay 5% tax to get it all into Roth. Run your own #'s to find out.
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seattlecyclone

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I have a question on the Traditional->Roth laddering post age 59.5.   Can I continue to ladder after 59.5?  Is there a required end where laddering is not available?  (Or maybe: laddering becomes impractical at 70.5 when RMDs kick in and make the matter moot?)

I am also assuming the goal here is to convert exactly the amount (or "at least the amount") taxed at 0%.  For example, in 2015 with no other income that might be $12,600 (standard deduction) + $8000 (2 personal exemptions) + $6,650 (deduction for max HSA contribution) = $27,250.   Correct?

It can continue beyond 59.5. Not sure about 70.5 but I don't see why not. Your assumptions are correct. I would say "at least the amount" because in order to convert a large T.IRA you may need to pay some tax over time. You might have to pay 5% tax to get it all into Roth. Run your own #'s to find out.

Yeah, no reason you couldn't keep doing Roth conversions indefinitely. After 70 you'll need to calculate and withdraw your RMD before doing any Roth conversions, but conversions are still allowed.

As to how much is best to convert every year, it really depends on your circumstances. Before the ACA I would say there's no downside whatsoever to converting the tax-free amount, but if you're planning to get health insurance through your exchange then any additions to your AGI (even if they're not subject to income tax) will affect the amount you pay for insurance. It's still probably a good idea to do this, but you'll need to run the numbers based on your pre-tax retirement account balance and how old you are at retirement.
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The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

Spork

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Yeah, no reason you couldn't keep doing Roth conversions indefinitely. After 70 you'll need to calculate and withdraw your RMD before doing any Roth conversions, but conversions are still allowed.

As to how much is best to convert every year, it really depends on your circumstances. Before the ACA I would say there's no downside whatsoever to converting the tax-free amount, but if you're planning to get health insurance through your exchange then any additions to your AGI (even if they're not subject to income tax) will affect the amount you pay for insurance. It's still probably a good idea to do this, but you'll need to run the numbers based on your pre-tax retirement account balance and how old you are at retirement.

Yeah, these are exactly the scenarios I am running...  to balance our expected budget vs ACA vs taxes.  2016 is my first FIRE year, so I imagine I will make a stab at it, see how it works, and re-stab it 2017.  Even with excessive number crunching on paper, I'm expecting it to take a couple of years iteration before I figure out what I am doing.
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Cheddar Stacker

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I have a question on the Traditional->Roth laddering post age 59.5.   Can I continue to ladder after 59.5?  Is there a required end where laddering is not available?  (Or maybe: laddering becomes impractical at 70.5 when RMDs kick in and make the matter moot?)

I am also assuming the goal here is to convert exactly the amount (or "at least the amount") taxed at 0%.  For example, in 2015 with no other income that might be $12,600 (standard deduction) + $8000 (2 personal exemptions) + $6,650 (deduction for max HSA contribution) = $27,250.   Correct?

It can continue beyond 59.5. Not sure about 70.5 but I don't see why not. Your assumptions are correct. I would say "at least the amount" because in order to convert a large T.IRA you may need to pay some tax over time. You might have to pay 5% tax to get it all into Roth. Run your own #'s to find out.
Indecision may or may not be my problem.

ofits

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Hello Mustachians. I am a longtime MMM reader, and I have some questions regarding the specifics of this rollover technique to ensure I properly understand it.

First: When a traditional IRA is rolled over into a Roth IRA, the amount is added to that year's taxable income. Now suppose that one doesn't have any taxable income for 2015. That would mean that an amount of the IRA equal to the 2015 standard deduction could be rolled over without paying any taxes whatsoever, correct?

Second: I understand that the funds in a Roth IRA are treated as 3 components: contributions (i.e. money actually contributed to the Roth IRA), conversions (i.e. money that used to be in a traditional IRA), and returns (i.e. interest from the investments in the Roth IRA). I'm still a bit fuzzy on this last component - if I convert my traditional IRA to a Roth IRA, does the 'return' portion of the traditional IRA count as conversion or return for purposes of not being able to touch it until after I'm 59.5?

Clarifying example: suppose I have a Vanguard IRA that lists $5,000 in 'Purchases & withdrawals' and $100 in 'Personal investment returns'. I roll the entire sum into a Roth IRA. I wait 5 years. Ignoring any returns gained in the intervening 5 years, will I be able to withdraw $5,100 penalty-free, or only $5,000?

Thanks!

MDM

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...suppose that one doesn't have any taxable income for 2015. That would mean that an amount of the IRA equal to the 2015 standard deduction could be rolled over without paying any taxes whatsoever, correct?
Slightly better: you get to add the personal exemption amount ($4,000 for 2015) also.

Quote
Clarifying example: suppose I have a Vanguard IRA that lists $5,000 in 'Purchases & withdrawals' and $100 in 'Personal investment returns'. I roll the entire sum into a Roth IRA. I wait 5 years. Ignoring any returns gained in the intervening 5 years, will I be able to withdraw $5,100 penalty-free, or only $5,000?
$5,100.

None of the tIRA money - not the original contribution, and not the returns - were taxed prior to the rollover.  When you did the rollover, you were taxed on the entire amount, so that is your conversion amount.

ofits

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...suppose that one doesn't have any taxable income for 2015. That would mean that an amount of the IRA equal to the 2015 standard deduction could be rolled over without paying any taxes whatsoever, correct?
Slightly better: you get to add the personal exemption amount ($4,000 for 2015) also.

Quote
Clarifying example: suppose I have a Vanguard IRA that lists $5,000 in 'Purchases & withdrawals' and $100 in 'Personal investment returns'. I roll the entire sum into a Roth IRA. I wait 5 years. Ignoring any returns gained in the intervening 5 years, will I be able to withdraw $5,100 penalty-free, or only $5,000?
$5,100.

None of the tIRA money - not the original contribution, and not the returns - were taxed prior to the rollover.  When you did the rollover, you were taxed on the entire amount, so that is your conversion amount.

Excellent, thank you for clarifying!

TomTX

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I think I've come up with a novel way to start drawing all retirement account money with little restriction starting at age 54-55. I'd like some more eyeballs and critiques on the proposal to either firm it up, or dispose of it.

http://forum.mrmoneymustache.com/welcome-to-the-forum/a-novel-approach-to-free-access-of-tira401k-money-at-age-54-55-instead-of-59-5/
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mooreprop

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Does anyone know the rules for a 403b?  I am a public school teacher, and was told by the advisor that I am not allowed to touch any of the money until I am 59 1/2 unless I am fired from my job.  Even if I quit, he said that I cannot get any distribution regardless of whether I am prepared to pay the 10% penalty.  This does not seem right to me.

BackyarBQ

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Does anyone know the rules for a 403b?  I am a public school teacher, and was told by the advisor that I am not allowed to touch any of the money until I am 59 1/2 unless I am fired from my job.  Even if I quit, he said that I cannot get any distribution regardless of whether I am prepared to pay the 10% penalty.  This does not seem right to me.

Same rules apply for 403b and 401k alike. You can leave your employer, roll over your 403b to a Traditional IRA and then begin your conversion ladder.

Advisors for public school employees are banking on long careers, bad products, and fear. Learn everything on your own and go have a really uncomfortable (for him) conversation.

Do you have a 457b option?

MDM

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Does anyone know the rules for a 403b?  I am a public school teacher, and was told by the advisor that I am not allowed to touch any of the money until I am 59 1/2 unless I am fired from my job.  Even if I quit, he said that I cannot get any distribution regardless of whether I am prepared to pay the 10% penalty.  This does not seem right to me.
This thread applies both to 401k and 403b (and others - see the first post) plans.  That advisor is incorrect.  If you leave your employer (either by firing or quitting), the general rule is that you have 3 options:
1.  Leave the funds in the 403b
2.  Transfer the funds to the 403b/401k of a new employer
3.  Roll the 403b funds into an IRA

See https://www.irs.gov/pub/irs-tege/rollover_chart.pdf for the "official" version.

BackyarBQ

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See https://www.irs.gov/pub/irs-tege/rollover_chart.pdf for the "official" version.

I have never seen this before. Does that really say I can roll over my 403b to my 457b when I leave my employer?

dandarc

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See https://www.irs.gov/pub/irs-tege/rollover_chart.pdf for the "official" version.

I have never seen this before. Does that really say I can roll over my 403b to my 457b when I leave my employer?
Any money rolled into a 457B that doesn't come from a 457B doesn't get the same exclusion from the 10% penalty for withdrawals at any age.  So even if you can do it, you don't get the big 457 benefit of penalty-free withdrawals at any age on the rollover money.

This is why the 457B has to keep separate accounts if it accepts rollovers from non-457B accounts.
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BackyarBQ

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See https://www.irs.gov/pub/irs-tege/rollover_chart.pdf for the "official" version.

I have never seen this before. Does that really say I can roll over my 403b to my 457b when I leave my employer?
Any money rolled into a 457B that doesn't come from a 457B doesn't get the same exclusion from the 10% penalty for withdrawals at any age.  So even if you can do it, you don't get the big 457 benefit of penalty-free withdrawals at any age on the rollover money.

This is why the 457B has to keep separate accounts if it accepts rollovers from non-457B accounts.

Ahh, I remember hearing that before. Thanks

FIRE4Science

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What kills this is the "paying any normal income tax due on that amount" and the "5 year wait" after you have paid your normal income tax on it...one could just withdraw it normally and not have their money locked for future Government taxation and stealing of it. This will only free you quickly if you make over $100k/yr where you can contribute the max in your 401k/roth IRA and invest money in a taxable account to free you by even age 40.

MDM

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What kills this is the "paying any normal income tax due on that amount" and the "5 year wait" after you have paid your normal income tax on it...one could just withdraw it normally and not have their money locked for future Government taxation and stealing of it.
You would prefer to give the IRS an extra 10% up front (early withdrawal penalty) instead of putting in the Roth where there is a decent chance it will never be taxed?

dandarc

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What kills this is the "paying any normal income tax due on that amount" and the "5 year wait" after you have paid your normal income tax on it...one could just withdraw it normally and not have their money locked for future Government taxation and stealing of it.
You would prefer to give the IRS an extra 10% up front (early withdrawal penalty) instead of putting in the Roth where there is a decent chance it will never be taxed?
This.  If you really want the money before the 5 years is up in the Roth ladder, you can take it out and pay the 10% penalty retroactively.
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CanuckExpat

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Does anyone know about taking a 401k / IRA as an annuity before 59 1/2 and lack of an early withdrawal penalty: Are there specific regulations that cover that or is it simply an application of substantial and equal periodic payments?

I recently quit jobs and got the paperwork from my old 401k provider about options for my vested balance. There was the standard options to leave the balance in the old 401k, take it as a lump sum and pay taxes + penalty if under 60, and to roll over the balance to an IRA or new employer 401k. They also listed the option to convert the balance to an annuity (looks like standard single life and joint/survivor immediate annuity) and stated "this option may allow you to receive payments before age 59 1/2 without paying the 10 percent early withdrawal penalty"

Anyone know about this?
The most information I could find with some searching was some recent-ish news stating that regulations have been changed to make it easier for 401k providers to sell annuities.

Leaving aside the question if an annuity would be the ideal purchase or not, it does seem more convenient than managing the 72(t) rule yourself, or a ROTH conversion pipeline, if you wanted an annuity, a a Solution for the Cautious Retiree as it were
Was targetting Freedom35 but ended up retiring a couple years early. Currently Based in Buffalo for the summer.

MoonShadow

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Does anyone know about taking a 401k / IRA as an annuity before 59 1/2 and lack of an early withdrawal penalty: Are there specific regulations that cover that or is it simply an application of substantial and equal periodic payments?

I recently quit jobs and got the paperwork from my old 401k provider about options for my vested balance. There was the standard options to leave the balance in the old 401k, take it as a lump sum and pay taxes + penalty if under 60, and to roll over the balance to an IRA or new employer 401k. They also listed the option to convert the balance to an annuity (looks like standard single life and joint/survivor immediate annuity) and stated "this option may allow you to receive payments before age 59 1/2 without paying the 10 percent early withdrawal penalty"

Anyone know about this?

There is a whole lot to substantially equal periodic payments, and a whole lot of ways to get burned.  It's really only for people who are forced into early retirement for catastrophic medical reasons; because once you start, you can't stop.  A roth conversion pipeline is almost always a better way to get to your 401K funds early, but anyone can get to their 401K funds after 55 by just resigning after their 55th birthday.  It's the "early retirement" clause and only applies to the funds that were in your last company's 401K (and rollovers from other company 401k's that are at least 5 years old)

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O.K., stupid question time:  For conversions from a tIRA to a Roth that are made after age 59.5, does the waiting period apply?  I presume not, because you are past the point where you would be penalized for early withdrawals from the tIRA, but I don't think I've ever seen this question addressed specifically.  And I'm too lazy to go look it up on irs.gov.
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Cheddar Stacker

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I didn't look it up either, but i'd bet dollars to donuts there is no circumstance after 59.5 where you can be charged a penalty for taking your money out.

The only applicable penalty I can think of would be from not taking an RMD after 70.5.
Indecision may or may not be my problem.

sol

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Does anyone know about taking a 401k / IRA as an annuity before 59 1/2 and lack of an early withdrawal penalty

At least for federal retirees the annuity option is genuinely penalty free but the rates are so terrible that it's actually worse overall.  The rates are bad to begin with and they get worse if you take them early.

MDM

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O.K., stupid question time:  For conversions from a tIRA to a Roth that are made after age 59.5, does the waiting period apply?  I presume not, because you are past the point where you would be penalized for early withdrawals from the tIRA, but I don't think I've ever seen this question addressed specifically.  And I'm too lazy to go look it up on irs.gov.
Depends on which 5 year waiting period you have in mind.

See https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/ for more details.

seattlecyclone

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I didn't look it up either, but i'd bet dollars to donuts there is no circumstance after 59.5 where you can be charged a penalty for taking your money out.

The key is that there's no penalty for "qualified distributions." Being 59 is one component of that. The other component is that you need to have had the Roth IRA account open for at least five years. Open your Roth IRA before age 55 and you should be free to withdraw whatever money you want after 59 without penalty.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

Monkey Uncle

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O.K., stupid question time:  For conversions from a tIRA to a Roth that are made after age 59.5, does the waiting period apply?  I presume not, because you are past the point where you would be penalized for early withdrawals from the tIRA, but I don't think I've ever seen this question addressed specifically.  And I'm too lazy to go look it up on irs.gov.
Depends on which 5 year waiting period you have in mind.

See https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/ for more details.

Thanks for that.  I was thinking of the conversion waiting period.
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Monkey Uncle

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I didn't look it up either, but i'd bet dollars to donuts there is no circumstance after 59.5 where you can be charged a penalty for taking your money out.

The key is that there's no penalty for "qualified distributions." Being 59 is one component of that. The other component is that you need to have had the Roth IRA account open for at least five years. Open your Roth IRA before age 55 and you should be free to withdraw whatever money you want after 59 without penalty.

Duh, yes.  Once you've hit 59 1/2, you can take a qualified distribution from your tIRA, regardless of whether you spend it or put it in your Roth.  I told you it was a stupid question. ;)
"Take this job and shove it" - David Allan Coe

TrulyStashin

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Does anyone know the rules for a 403b?  I am a public school teacher, and was told by the advisor that I am not allowed to touch any of the money until I am 59 1/2 unless I am fired from my job.  Even if I quit, he said that I cannot get any distribution regardless of whether I am prepared to pay the 10% penalty.  This does not seem right to me.

I was a public school teacher and quit in 2008 to go to law school.  While in school, I rolled my 403b fund into a tIRA and then into a Roth.  Because I had no income at the time, I paid no tax.  Since 2010, my Roth has more than doubled in value (yay!) and I've never paid tax and will not pay tax on any of it.

That advisor is full of hooey.
I refinanced my student loans with SoFi and dropped my interest rate from over 7% to 3.9%.

rubybeth

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I think this thread needs a clarification for 457b plans: you can take funds from this account BEFORE age 59.5 with NO penalty, and NO need to do the pipeline method.

https://www.bogleheads.org/wiki/457(b)
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MoonShadow

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I think this thread needs a clarification for 457b plans: you can take funds from this account BEFORE age 59.5 with NO penalty, and NO need to do the pipeline method.

https://www.bogleheads.org/wiki/457(b)

Why?  Aren't 457b plans different enough to justify their own thread?

rubybeth

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I think this thread needs a clarification for 457b plans: you can take funds from this account BEFORE age 59.5 with NO penalty, and NO need to do the pipeline method.

https://www.bogleheads.org/wiki/457(b)

Why?  Aren't 457b plans different enough to justify their own thread?

I'm confused why you're asking me this. There are other threads on 457b accounts, but the first line of the first post in this thread mentions the 457b and pipelines, and it's not necessary to convert 457b funds to a Roth IRA in order to access them before 59.5. It's one of the greatest things about having access to a 457b.

From the first page, OP:

Did you know that you can withdraw funds from your Roth IRA, traditional IRA, 401k, Roth 401k, TSP, Roth TSP, 403b, or 457b before age 59.5 and without a penalty? It's true!

The secret is using the Roth IRA Conversion Pipeline ("Roth Pipeline") and/or Substantially Equal Periodic Payments (SEPP--also called 72t).
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retiringearly

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This forum kicks major ass.  Thanks for all the awesome information.

forummm

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I think this thread needs a clarification for 457b plans: you can take funds from this account BEFORE age 59.5 with NO penalty, and NO need to do the pipeline method.

https://www.bogleheads.org/wiki/457(b)

Updated the intro post to reflect this.