Place to discuss retirement funding. Focused on the under 59-1/2 crowd.
Non-professional
Non-advice
72(t) aka SEPP
Roth vs Traditional IRA
Roth Ladders
Non-professional
Non-advice
72(t) aka SEPP
Roth vs Traditional IRA
Roth Ladders
Last edited:
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US Resident Early Retirement Strategies
- Thread starter mongo
- Start date
Practical Guide to 72T (but from 2003 so some parts may be outdated): https://72tnet.com/wp-content/uploa...-To-SEPPS-and-IRC-72t-Bill-Stecker-4th-ed.pdf
Useful site and forum for 72T: 72tNET – Retire with Confidence
72T Calculator: 72t Calculator - IRA distributions without a penalty
120% Mid-term AFRs to calculate "reasonable interest rate": Index of Applicable Federal Rates (AFR) Rulings
Useful site and forum for 72T: 72tNET – Retire with Confidence
72T Calculator: 72t Calculator - IRA distributions without a penalty
120% Mid-term AFRs to calculate "reasonable interest rate": Index of Applicable Federal Rates (AFR) Rulings
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How To Create A Roth IRA Conversion Ladder
Monies rolled over into a Roth can be pulled out after 5 years penalty free. Each conversion has its own 5 year count down. One can also withdraw conversions penalty free after 59-1/2.
Withdrawn earnings are taxable until 5 years after the Roth was established.
Earnings get a penalty if withdrawn before 59-1/2.
The rollover is taxed.
Monies rolled over into a Roth can be pulled out after 5 years penalty free. Each conversion has its own 5 year count down. One can also withdraw conversions penalty free after 59-1/2.
Withdrawn earnings are taxable until 5 years after the Roth was established.
Earnings get a penalty if withdrawn before 59-1/2.
The rollover is taxed.
401(k)
401(k) plan assets are shielded from bankruptcy and creditors more than IRAs.
If you have a 401k at your employer and stop being employed for any reason on or after the year you turn 55, you can access that account penalty free.
Some 401k plans allow rolling prexisting older 401ks and IRAs into them. So you may be able to make a lot of your account value penalty free at 55.
Can I Get Money From My 401(k) at 55? | The Motley Fool
Top Reasons Not to Roll Over Your 401(k) to an IRA
401(k) plan assets are shielded from bankruptcy and creditors more than IRAs.
If you have a 401k at your employer and stop being employed for any reason on or after the year you turn 55, you can access that account penalty free.
Some 401k plans allow rolling prexisting older 401ks and IRAs into them. So you may be able to make a lot of your account value penalty free at 55.
Can I Get Money From My 401(k) at 55? | The Motley Fool
Top Reasons Not to Roll Over Your 401(k) to an IRA
I started taking 72t distributions this year (or rather a single large distribution for the year). Since it's the first year, it hasn't survived the fire of an audit yet. But based on everything I've read about Substantially Equal Periodic Payments, I should have everything right.
What I did:
- after quitting my job (due to time conflicts between my employer's needs and my children's needs - sometimes being forced to do things end up being a blessing in disguise), I rolled my company's 401k into my traditional IRA (no tax implications, BUT only allowed to do one per 12-month period!).
- converted a fraction of my traditional IRA into a Roth IRA (I calculated the entire conversion amount as taxable to simplify my taxes).
- and once everything was settled and had a full monthly statement with all the rollover funds settled and completed, THEN I took my distribution based upon the total shown in that month's statement (instead of Dec 31st statement as specified, since this is my first distribution).
- I used the RMD method, since it means I'll withdraw more as my IRA grows (along with Tesla's SP). The other two methods were too complicated and troublesome for the ONE year that they would give me a higher distribution.
- I chose to withhold Federal and State income taxes at the time of distribution in hopes that it would simplify my tax return.
Hope this helps someone else with their early retirement plans!
What I did:
- after quitting my job (due to time conflicts between my employer's needs and my children's needs - sometimes being forced to do things end up being a blessing in disguise), I rolled my company's 401k into my traditional IRA (no tax implications, BUT only allowed to do one per 12-month period!).
- converted a fraction of my traditional IRA into a Roth IRA (I calculated the entire conversion amount as taxable to simplify my taxes).
- and once everything was settled and had a full monthly statement with all the rollover funds settled and completed, THEN I took my distribution based upon the total shown in that month's statement (instead of Dec 31st statement as specified, since this is my first distribution).
- I used the RMD method, since it means I'll withdraw more as my IRA grows (along with Tesla's SP). The other two methods were too complicated and troublesome for the ONE year that they would give me a higher distribution.
- I chose to withhold Federal and State income taxes at the time of distribution in hopes that it would simplify my tax return.
Hope this helps someone else with their early retirement plans!
My understanding is the 12 month rule is for non-trustee IRA to IRA rollovers (i.e. check to person to new (or same) IRA). 401k rollovers to IRAs are not limited. This was added to prevent people using the 60 day rollover rule as an indefinite short term loan.
Rollovers of Retirement Plan and IRA Distributions | Internal Revenue Service
https://www.irs.gov/pub/irs-tege/rollover_chart.pdf
Here's a calculator for the three methods. Note the default interest rate is much higher than the currently allowable value:
72t Distribution Calculator
You're right. When quitting a company, there was no direct rollover option for me (like when moving to a different company), so I was issued a check that I then deposited into my IRA. Little gotchas like that made me go through the process slowly and carefully.
As for the calculator, it's the fact that you have to find what the mid-term rate is, calculate 120% of it, and then use that to calculate the distribution amount that I didn't like. RMD method was much more straight-forward. And considering how well Tesla has done since May, I would've switched to the RMD method for next year anyway. That's what I meant.
adiggs
Well-Known Member
I second the 72tnet.com link. I got some great info from there - details like how to actually set one of these up, the paperwork to hang onto, what reporting is going to be done for you and what you need to do yourself.
One of the things I learned is that 72t distribution plans aren't attached to specific accounts. So one could, for instance, add up the rollover IRA plus Roth to determine the amount to calculate the distribution, but then take it all from the IRA. Definitely don't take my word for it - i'm not a tax pro etc.. And really don't take my word for how completely accurate in all the details I've got it.
Best detailed link I've found for 72t stuff and I've been searching for more than a year for good info (I've decided not to go the 72t route - it doesn't really fit my own needs, but I had to learn a lot about them to figure that out).
⚡️ELECTROMAN⚡️
Village Idiot
My biggest concern is the cost of medical insurance. How much should I be expecting to pay for decent coverage? I’m 51 and single. Is age much of a factor?
Per the IRS, a SEPP plan allows one to draw converted amounts from a Roth conversion penalty free irrespective of the normal 5 year window.
Pages 30&31 https://www.irs.gov/pub/irs-pdf/p590b.pdf
Not sure on utility, but this trades the upfront conversion tax rate for tax free withdrawl later. In other words, the Roth SEPP amount is at 0 percent instead of one's marginal (highest) tax rate. Again, if this starts tapping earnings, then those will be taxed.
Informative article on SEPP, including warnings on triggering the penalty clause: Substantially Equal Periodic Payments from an IRA
Pages 30&31 https://www.irs.gov/pub/irs-pdf/p590b.pdf
Not sure on utility, but this trades the upfront conversion tax rate for tax free withdrawl later. In other words, the Roth SEPP amount is at 0 percent instead of one's marginal (highest) tax rate. Again, if this starts tapping earnings, then those will be taxed.
Informative article on SEPP, including warnings on triggering the penalty clause: Substantially Equal Periodic Payments from an IRA
adiggs
Well-Known Member
That was mine as well.
The company I retired from offers a retiree medical plan that amounts to a continuation of the insurance provided while employed. But it costs around $2500/month for a high deductible plan. We like the provider but $30k/year doesn't sound great
When I went looking at the provider's plans available to individuals I found what looks like the plan we already have that priced out as $1k/month.
I'm 53 and married, but no kids; I expect that age does matter but I don't know to what degree.
We're still on COBRA from when I retired, but this is our intent - get the plan direct from the provider rather than use the available retiree medical plan. At the very least these provide us with a couple of options, so we do know our worst case!
It probably does. I'm 47, and an HMO plan (whole family - wife + 2 kids) similiar to what I used to have is about 2x (~$1k/month) what it would've cost under an employer's plan. In addition to that, if I had priced that same policy for just myself, the premium made up half of the family price - this means the kids cost almost nothing to insure. That's the only thing I miss about being employed - how much our health and dental insurance is subsidized.
Anyone know if starting a non-profit and paying employee benefits (I would be an employee of that non-profit) would save on the health insurance premiums?
There are trade off's with the non-profit - size, employees, employees on insurance, part of a larger group etc.
Huge companies can have great insurance because there are economies of scale at work with the subsidy.
I am 43 and just went through the exercise of looking for insurance as well and there are other plans out there that will offer discounts for members of different groups - like AARP or certain Church related groups.
I was pricing out Wife/kids (twins 2 year olds) and myself and was finding about $1200 a month for like coverage and my AARP membership took 15% off but I had to tell the agent about it (AARP is open to anyone but it is assumed you are over 550
Not sure why I wrote all that but there are options but the easy one is not starting a non-profit for saving on health insurance.....
Good luck!
With respect to healthcare and insurance plans for retirees or SE age totally matters. The factors that have the biggest impact are age, smoker or non smoker and zip code. Once you hit 50 that is a pretty big jump up in subscription rates.
adiggs
Well-Known Member
For myself, with many years to Medicare, I went out to the website of my current health insurer (we like them a lot - they just process claims and don't lose them due to failed fax machines, or under a pile of paper, or you know - whatever). I went browsing around their site and found a plan that looks a lot like what I currently have via COBRA from my employer at a similar price ($1k/month for 2 adults, both >50). When COBRA runs out I plan to shift over to that plan. I'll probably even talk to them months ahead of time to confirm that I'll be getting similar coverage (I know its similar up front - lifetime limits though might be different, and those matter).
Who knows - maybe the exchange would have gotten me to a similar or better plan for similar or lower premium; I'm big into satisficing these days as an optimization strategy. I.e. - when I find a satisfactory solution that doesn't completely blow me out of the water on cost, then I take it and move on; my time and energy to look for a better deal are valuable to me, and frequently not worth the effort. Admittedly - health insurance is a big enough cost that this might be a good one to shop around
Who knows - maybe the exchange would have gotten me to a similar or better plan for similar or lower premium; I'm big into satisficing these days as an optimization strategy. I.e. - when I find a satisfactory solution that doesn't completely blow me out of the water on cost, then I take it and move on; my time and energy to look for a better deal are valuable to me, and frequently not worth the effort. Admittedly - health insurance is a big enough cost that this might be a good one to shop around
I could be wrong, but I don't think there ARE any lifetime caps, at least not for a qualified plan authorized by a state insurer. There are certainly ANNUAL out of pockets maxes that can vary greatly. check it out.For myself, with many years to Medicare, I went out to the website of my current health insurer (we like them a lot - they just process claims and don't lose them due to failed fax machines, or under a pile of paper, or you know - whatever). I went browsing around their site and found a plan that looks a lot like what I currently have via COBRA from my employer at a similar price ($1k/month for 2 adults, both >50). When COBRA runs out I plan to shift over to that plan. I'll probably even talk to them months ahead of time to confirm that I'll be getting similar coverage (I know its similar up front - lifetime limits though might be different, and those matter).
Who knows - maybe the exchange would have gotten me to a similar or better plan for similar or lower premium; I'm big into satisficing these days as an optimization strategy. I.e. - when I find a satisfactory solution that doesn't completely blow me out of the water on cost, then I take it and move on; my time and energy to look for a better deal are valuable to me, and frequently not worth the effort. Admittedly - health insurance is a big enough cost that this might be a good one to shop around
I'm not sure if you want to work while "retired" but if you DO work, and make 10-20K a year as a 1099, all your healthcare insurance expense is deductible, so at least on whatever that first large nut is for healthcare, you pay very little in self employed payroll taxes or any taxes for that matter. Just a thought.
⚡️ELECTROMAN⚡️
Village Idiot
Are the healthcare insurance expenses deductible for the taxes you have to pay on your IRA withdrawals?
I don’t believe so, that’s not 1099 income and taxed at earned income rates - but check with your tax advisor. I think there IS/Will be legislation to allow healthcare insurance fees (not deductibles, copays, etc) to be a line item deduction for ppl not yet eligible for Medicare and who don’t have a 1099 type of income stream, and that doesn’t require a 7.5 or 10% threshold to be achieved before deductibility.
I was not aware of the extra two weeks, thanks!
Non advice:
This setup of roll in Q4, tax in January also has the bonus of the money pulled out to pay the taxes being in next year's income instead of being at your marginal rate on top of the Roth conversion.
One can use this when starting their Roth ladder to supercharger the balance. Which is handy as only conversions that have aged 5 years can be pulled penalty free. So a bigger amount to start can help cover lower amounts later.
General approach is to swap tax payment and inital Roth conversion amounts between tax years to keep total income flat, but allow more Roth access sooner (and more Roth earnings*).
I.e. if you were doing a ladder and had 50k in tax on the conversion each year, you could increase the conversion by 50k this year, and decrease it by 50k next year whioe paying the additional 50k of tax. This gives an extra 50k accessible in 5 years (well, 4 years and a month if done in December)
*Of course, the earlier you convert, the longer the conversion grows, in that sense January of a year is better than December. However, for an early retirement ladder, the critical amount is the conversion as that is what can be accessed penalty free. So in some ways, growing the money before conversion can be more helpful.
Thanks for the heads up! l'd read about the caps on value, but missed the other proposed changes.
Major changes:
Recent versions would prevent after tax IRA contribution rollovers (back door Roth).
Normal pretax contribution rollovers would have income limits.
Date of change bumped out to 2029.
This would be a problem for early retirees using a Roth ladder to access funds early penalty free. Miving effective date out helps a lot with planning.
Best link I found:
https://401kspecialistmag.com/mega-roth-ira-ban-back-in-biden-bill-but-not-until-2029/
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