Rob Base 2.0
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Post by Rob Base 2.0 on Jan 27, 2018 12:41:31 GMT -5
anyone here ever use SEPP (substantial equal periodic payments) withdrawals to access IRA $ before age 59.5?
if so, how did it work exactly? (and i will have more questions probably too).
thanks
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tallguy
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Post by tallguy on Jan 27, 2018 15:15:30 GMT -5
No, and if it were me I would not even try unless I had no other choice. The rules are onerous and screwing up any of them could be very costly. Here is an explanation from Investopedia. By the way, I think there is a typo in the article. I'm guessing that the author really meant younger than 54 instead of 44 here:
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Rob Base 2.0
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Post by Rob Base 2.0 on Jan 28, 2018 9:57:50 GMT -5
I know the rules seem intense if you mess it up. But I will need my money before 59.
Anyone ever done it?
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vonna
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Post by vonna on Jan 28, 2018 10:42:25 GMT -5
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Post by Deleted on Jan 28, 2018 11:19:54 GMT -5
Huh. I never knew this was available for IRAs. I knew about the 72t with regard to employer plans and being over 55, but never heard of this. Filing away as another possibility for a few years from now.
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phil5185
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Post by phil5185 on Jan 28, 2018 12:32:23 GMT -5
Maybe it would be better to borrow against your accounts for the pre-59 1/2 needs - and leave your own money in place until 59 1/2.
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tallguy
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Post by tallguy on Jan 28, 2018 12:41:49 GMT -5
I know the rules seem intense if you mess it up. But I will need my money before 59.
Anyone ever done it? How long before 59?
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Rob Base 2.0
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Post by Rob Base 2.0 on Jan 28, 2018 13:06:05 GMT -5
I know the rules seem intense if you mess it up. But I will need my money before 59.
Anyone ever done it? How long before 59? I really dont want to work past 55. maybe 52 even....
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tallguy
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Post by tallguy on Jan 28, 2018 13:14:43 GMT -5
I really dont want to work past 55. maybe 52 even.... There is a rule that you can access a 401k without penalty if you leave your employer at 55 or later. That may be dependent on whether your plan allows partial withdrawals while leaving some of the money there. If you have to roll it over to an IRA you are then locked in until 59.5 again. Do you or will you have a 401k available or are you limited to IRA money?
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Rob Base 2.0
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Post by Rob Base 2.0 on Jan 28, 2018 14:16:28 GMT -5
I really dont want to work past 55. maybe 52 even.... There is a rule that you can access a 401k without penalty if you leave your employer at 55 or later. That may be dependent on whether your plan allows partial withdrawals while leaving some of the money there. If you have to roll it over to an IRA you are then locked in until 59.5 again. Do you or will you have a 401k available or are you limited to IRA money? I have 401K $$ too.
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tallguy
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Post by tallguy on Jan 28, 2018 14:54:24 GMT -5
There is a rule that you can access a 401k without penalty if you leave your employer at 55 or later. That may be dependent on whether your plan allows partial withdrawals while leaving some of the money there. If you have to roll it over to an IRA you are then locked in until 59.5 again. Do you or will you have a 401k available or are you limited to IRA money? I have 401K $$ too. First thing I would do then is check the plan literature. See if it allows partial withdrawals and whether retirees can leave money in the plan or must withdraw it when they leave employment. Also see if they would do a total distribution in more than one check. If they allow a retiree to leave money in the plan then you should be set as long as you stay until 55. Just withdraw what you want each year. If you must roll over your account when you leave you could do maybe do a direct rollover for most of it and a no-penalty distribution for part. The distribution part would be taxable, of course, so anything too large might be a pretty high tax burden. The other option would be to spend the intervening years building up your taxable portfolio so you can use that money. I got burned a little bit when I retired. My company was sold and closed. The 401k plan was terminated, so no opportunity to leave money there, and they required a total distribution in one check. If I had the check made out to me they would have withheld way too much for me to cover in doing a manual rollover. I thus had to do a direct rollover and give up access to the money. Fortunately, I had planned for it and built up my savings to live off of for the time until I hit 59.5. I did NOT want to pull from my Roth or sell taxable. I might have even borrowed if I had to in order to avoid either of those options, but even with an additional $17,000 in expenses from higher income tax and planned home repairs I should still have a several thousand dollar cushion for the year.
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Rob Base 2.0
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Post by Rob Base 2.0 on Jan 28, 2018 15:11:00 GMT -5
First thing I would do then is check the plan literature. See if it allows partial withdrawals and whether retirees can leave money in the plan or must withdraw it when they leave employment. Also see if they would do a total distribution in more than one check. If they allow a retiree to leave money in the plan then you should be set as long as you stay until 55. Just withdraw what you want each year. If you must roll over your account when you leave you could do maybe do a direct rollover for most of it and a no-penalty distribution for part. The distribution part would be taxable, of course, so anything too large might be a pretty high tax burden. The other option would be to spend the intervening years building up your taxable portfolio so you can use that money. I got burned a little bit when I retired. My company was sold and closed. The 401k plan was terminated, so no opportunity to leave money there, and they required a total distribution in one check. If I had the check made out to me they would have withheld way too much for me to cover in doing a manual rollover. I thus had to do a direct rollover and give up access to the money. Fortunately, I had planned for it and built up my savings to live off of for the time until I hit 59.5. I did NOT want to pull from my Roth or sell taxable. I might have even borrowed if I had to in order to avoid either of those options, but even with an additional $17,000 in expenses from higher income tax and planned home repairs I should still have a several thousand dollar cushion for the year.
It's actually government TSP, and they let you leave money in plan after you leave. I will y to research more on that. Thanks
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teen persuasion
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Post by teen persuasion on Jan 28, 2018 15:12:10 GMT -5
Use a Roth conversion ladder. link
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Rob Base 2.0
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Post by Rob Base 2.0 on Jan 28, 2018 16:23:37 GMT -5
Use a Roth conversion ladder. link
I have to admit, I do NOT understand that at all............
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Deleted
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Post by Deleted on Jan 28, 2018 16:32:35 GMT -5
Use a Roth conversion ladder. link
I have to admit, I do NOT understand that at all............
The gist of it is you can withdraw Roth contributions tax/penalty free, but with conversions from Traditional IRA to Roth the contributions have to sit for 5 years first before you can withdraw them. So, if you roll 401K or Traditional into a Roth, then 5 years later you can withdraw them just like a regular Roth contribution. You paid the tax earlier when you converted and you don't get the penalty. I'm now kind of wishing I would have converted a bunch years ago.
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tallguy
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Post by tallguy on Jan 28, 2018 16:57:52 GMT -5
I have to admit, I do NOT understand that at all............
The gist of it is you can withdraw Roth contributions tax/penalty free, but with conversions from Traditional IRA to Roth the contributions have to sit for 5 years first before you can withdraw them. So, if you roll 401K or Traditional into a Roth, then 5 years later you can withdraw them just like a regular Roth contribution. You paid the tax earlier when you converted and you don't get the penalty. I'm now kind of wishing I would have converted a bunch years ago. Or do it without waiting by converting into a Roth and then pull out earlier contributions if you have them available. I've got four years of no real income now so I'm doing Roth conversions to fill up my 15% (now 12%) bracket.
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teen persuasion
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Post by teen persuasion on Jan 28, 2018 16:59:19 GMT -5
Use a Roth conversion ladder. link
I have to admit, I do NOT understand that at all............
You need 5 years worth of expenses you can use to bridge the gap. It can be in taxable, or Roth contributions that you can take out at any time (not growth). You figure out how much you want to withdraw 5 years from now, and convert it from traditional to Roth IRA, while withdrawing from your other bridge funds. Repeat each year. When the first conversion has seasoned 5 years, it is available to withdraw just like your bridge funds. Keep converting one year's worth of withdrawals each year to build your ladder. When you reach age 59.5, you can withdraw any amount penalty free, so you don't need to continue Roth conversions, but many keep converting to get as much as possible into Roth to keep RMDs lower at age 70.5.
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Deleted
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Post by Deleted on Jan 28, 2018 17:07:02 GMT -5
The "ladder" part is to control the taxes. You COULD just convert all of a 200K traditional IRA at once to Roth, pay the taxes at the time of conversion and then 5 years from now withdraw all that 200K tax/penalty free, but you'd get killed on taxes on the front end because you'd be in such a high bracket. Better to convert what you'll need every year and keep.
I do like this idea better than the SEPP deal. A lot simpler and not all risk.
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Rob Base 2.0
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Post by Rob Base 2.0 on Jan 28, 2018 17:21:15 GMT -5
I have to admit, I do NOT understand that at all............
The gist of it is you can withdraw Roth contributions tax/penalty free, but with conversions from Traditional IRA to Roth the contributions have to sit for 5 years first before you can withdraw them. So, if you roll 401K or Traditional into a Roth, then 5 years later you can withdraw them just like a regular Roth contribution. You paid the tax earlier when you converted and you don't get the penalty. I'm now kind of wishing I would have converted a bunch years ago.
But I would have to pay the taxes though, right? Can you just convert part of a TSP / 401K or do you have to do the whole thing? Like for example, if I have a $200K traditional TSP / 401K wouldn't I have to convert the whole thing? (that's a big tax bite).....also don't I have to quit jobs to access that money like that to convert it to a Roth IRA?
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teen persuasion
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Post by teen persuasion on Jan 28, 2018 20:07:19 GMT -5
The gist of it is you can withdraw Roth contributions tax/penalty free, but with conversions from Traditional IRA to Roth the contributions have to sit for 5 years first before you can withdraw them. So, if you roll 401K or Traditional into a Roth, then 5 years later you can withdraw them just like a regular Roth contribution. You paid the tax earlier when you converted and you don't get the penalty. I'm now kind of wishing I would have converted a bunch years ago.
But I would have to pay the taxes though, right? Can you just convert part of a TSP / 401K or do you have to do the whole thing? Like for example, if I have a $200K traditional TSP / 401K wouldn't I have to convert the whole thing? (that's a big tax bite).....also don't I have to quit jobs to access that money like that to convert it to a Roth IRA?
Yes, you have to pay taxes on the portion you convert. You don't have to convert the whole thing at once. But if you are dealing with TSP or a 401k, you may have to roll those over to a tIRA first. Don't know much about TSP rules, but I've heard you can only do one partial withdrawal before having to take everything out. So you might roll out half to a tIRA for a Roth conversion ladder, and leave some in TSP for the low cost funds. Usually you'd wait until you early retire before beginning to Roth convert, both so you can roll $ out of your employer's plan, and so your income is low to keep taxes on the conversion low. For example: say you want $24k in income from your retirement accounts each year. You have at least $120k in contributions between your and your spouse's Roth IRAs, and $480k in tIRAs. First year you can withdraw $24k from your Roth IRA, and convert $24k from your tIRA to your Roth IRA. You pay tax on the conversion $24k as ordinary income, but in 2018 the MFJ standard deduction is $24k, so your tax is zero. Years 2, 3, 4, 5 do the same. After this, your original $120k in Roth contributions are gone, but your first $24k conversion is fully seasoned and can be withdrawn while you keep making new conversions. Next year your second conversion can be withdrawn, and so on. If you need more per year, you will pay some tax, but as long as you keep conversions reasonable you will be in relatively low brackets. Other income, like pensions, push conversion income up into higher brackets.
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tallguy
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Post by tallguy on Jan 28, 2018 20:22:17 GMT -5
Apparently, a plan to liberalize TSP withdrawal rules passed Congress in November. Here's a link.
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Rob Base 2.0
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Post by Rob Base 2.0 on Jan 28, 2018 20:26:55 GMT -5
But I would have to pay the taxes though, right? Can you just convert part of a TSP / 401K or do you have to do the whole thing? Like for example, if I have a $200K traditional TSP / 401K wouldn't I have to convert the whole thing? (that's a big tax bite).....also don't I have to quit jobs to access that money like that to convert it to a Roth IRA?
Yes, you have to pay taxes on the portion you convert. You don't have to convert the whole thing at once. But if you are dealing with TSP or a 401k, you may have to roll those over to a tIRA first. Don't know much about TSP rules, but I've heard you can only do one partial withdrawal before having to take everything out. So you might roll out half to a tIRA for a Roth conversion ladder, and leave some in TSP for the low cost funds. Usually you'd wait until you early retire before beginning to Roth convert, both so you can roll $ out of your employer's plan, and so your income is low to keep taxes on the conversion low. For example: say you want $24k in income from your retirement accounts each year. You have at least $120k in contributions between your and your spouse's Roth IRAs, and $480k in tIRAs. First year you can withdraw $24k from your Roth IRA, and convert $24k from your tIRA to your Roth IRA. You pay tax on the conversion $24k as ordinary income, but in 2018 the MFJ standard deduction is $24k, so your tax is zero. Years 2, 3, 4, 5 do the same. After this, your original $120k in Roth contributions are gone, but your first $24k conversion is fully seasoned and can be withdrawn while you keep making new conversions. Next year your second conversion can be withdrawn, and so on. If you need more per year, you will pay some tax, but as long as you keep conversions reasonable you will be in relatively low brackets. Other income, like pensions, push conversion income up into higher brackets.
I guess I kind of understand, but still slightly confused. But how to access Roth TSP (401K)?
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CCL
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Post by CCL on Jan 28, 2018 22:37:18 GMT -5
I second the idea of using the 401k, if allowed by your plan. That's what we did and it's worked out fine. Hubby retired at 55 and I set up an automatic monthly withdrawal which gets deposited in our checking. Really, for us, it works exactly like the pension. Well, except the $$$ comes out of our account instead of the pension fund. It's been very flexible for us.
Ours was easy to set up thru Fidelity. I just went on the website, made a few clicks and the deposits started the next month. I like that I can make changes anytime. It's very simple.
I'm thinking about doing the 72t withdrawals with my IRA. I really don't see how it would be that much trouble to do. I might not spend it, but would like to pay the taxes on it before we start collecting Social Security. Or I might convert it to Roth. I don't know which way is better since our capital gains rate is zero now anyway. I hate the thought of paying extra taxes on SS income just because I cut our spending and saved it instead.
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CCL
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Post by CCL on Jan 28, 2018 22:48:19 GMT -5
The "ladder" part is to control the taxes. You COULD just convert all of a 200K traditional IRA at once to Roth, pay the taxes at the time of conversion and then 5 years from now withdraw all that 200K tax/penalty free, but you'd get killed on taxes on the front end because you'd be in such a high bracket. Better to convert what you'll need every year and keep. I do like this idea better than the SEPP deal. A lot simpler and not all risk. Can you explain what the risk would be? I'm not seeing it.
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CCL
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Post by CCL on Jan 28, 2018 22:58:07 GMT -5
I read that mmm link and it says SEPP withdrawals are taxable as income (makes sense for traditional IRAs and 401ks) even for Roths. I've never heard that before. If that's the case, I'd think it would be simpler and less taxes if you just withdraw the contributions? I sure would not pay taxes on my Roth withdrawals!
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Post by Deleted on Jan 28, 2018 23:05:03 GMT -5
The "ladder" part is to control the taxes. You COULD just convert all of a 200K traditional IRA at once to Roth, pay the taxes at the time of conversion and then 5 years from now withdraw all that 200K tax/penalty free, but you'd get killed on taxes on the front end because you'd be in such a high bracket. Better to convert what you'll need every year and keep. I do like this idea better than the SEPP deal. A lot simpler and not all risk. Can you explain what the risk would be? I'm not seeing it. From what I was reading it's really easy to screw up the withdrawal amount and then you owe penalty on EVERYTHING. Not just the screw up part. Plus, you're obligated to stay in the SEPP a minimum of 5 years or until your 59 1/2 whatever is LATER. So it could be that you start this at 52 and then want out for whatever reason like it becomes a tax issue where it wasn't when you started and you're stuck. In order to get out you have to pay the penalty on everything from the start.
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tallguy
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Post by tallguy on Jan 28, 2018 23:07:12 GMT -5
I read that mmm link and it says SEPP withdrawals are taxable as income (makes sense for traditional IRAs and 401ks) even for Roths. I've never heard that before. If that's the case, I'd think it would be simpler and less taxes if you just withdraw the contributions? I sure would not pay taxes on my Roth withdrawals! I'm not sure what you read, but it doesn't sound right. There is a five-year rule on withdrawing converted funds but after that there are no taxes due. And you do not take SEPP withdrawals from a Roth. You can withdraw contributions whenever you wish.
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tallguy
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Post by tallguy on Jan 28, 2018 23:08:33 GMT -5
Can you explain what the risk would be? I'm not seeing it. From what I was reading it's really easy to screw up the withdrawal amount and then you owe penalty on EVERYTHING. Not just the screw up part. Plus, you're obligated to stay in the SEPP a minimum of 5 years or until your 59 1/2 whatever is LATER. So it could be that you start this at 52 and then want out for whatever reason like it becomes a tax issue where it wasn't when you started and you're stuck. In order to get out you have to pay the penalty on everything from the start. Yeah, it's a mess if you do not follow the rules exactly.
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CCL
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Post by CCL on Jan 28, 2018 23:13:07 GMT -5
This part of the link: "Whether you pay the penalty or not, SEPP distributions are taxable as income--even distributions from a Roth IRA."
It didn't make any sense to me. Or maybe I'm just getting confused lol?
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CCL
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Post by CCL on Jan 28, 2018 23:18:42 GMT -5
Can you explain what the risk would be? I'm not seeing it. From what I was reading it's really easy to screw up the withdrawal amount and then you owe penalty on EVERYTHING. Not just the screw up part. Plus, you're obligated to stay in the SEPP a minimum of 5 years or until your 59 1/2 whatever is LATER. So it could be that you start this at 52 and then want out for whatever reason like it becomes a tax issue where it wasn't when you started and you're stuck. In order to get out you have to pay the penalty on everything from the start. I guess I'm thinking I could set it up with Fidelity, most likely with same yearly payment amount, then leave it be. I can't see any reason why I would ever need to change it. Of course if someone younger than me started payments they would be looking at a longer time commitment, so that might be trickier if they don't have other income sources.
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