NEW YORK (CNNfn) - When you find yourself in a position of needing access to your 401(k) money before the regular withdrawal age, you may be concerned about the potential penalties and other complications that may ensue.|
In response to a reader's question, Mark Groesbeck, a certified financial planner and a member of the Financial Planning Association, discusses the benefits of different options.
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I retired from the Federal government about 10 years ago, because of a disability (I have multiple sclerosis). I receive about $22,000 a year. I was also recently divorced and receive alimony. Currently this provides enough to adequately live on. However, I fear that the alimony could eventually be discontinued. I currently have a total of about $100,000 spread out over a 40l(k) plan, an IRA and a tax deferred thrift savings plan with the federal government. If necessary, what are my options of using these funds to generate cash flow or being able to make cash withdrawals without penalties? I am 48 years old.
Typically when you take withdrawals out of an IRA or retirement plan before you reach the age of 59-1/2, you have to pay a 10 percent tax penalty. However, this 10 percent penalty can be avoided by taking "substantially equal withdrawals" from your retirement assets. Under code section 72t individuals can avoid the penalty by taking distributions from retirement plans over a minimum of 5 years, or until you reach age 59-1/2. So if you began 72t distributions at age 48, you would need to continue the distributions until age 59-1/2.
There are three methods that can be used for a single individual when calculating the amount of annual distributions: minimum distribution, amortization, or annuitization.
Based on a retirement assets of $100,000 and your age of 48, your annual distributions for the next three years, starting in 2000, would be as follows. Minimum distribution method: $2,865, $3,085, $3,322 (assumes 8 percent growth and uses life expectancy table); Amortization method: $7,729 every year to age 59-1/2; Annuitization method: $8,050 every year to age 59-1/2. It is also possible for you to take 72t distributions on only a portion of your retirement assets. The portion of your retirement assets not included for 72t distributions would then be available to you for sporadic distributions should an unforeseen need arise.
Carefully consider your options before you get started, as you must stay with the same method once distributions begin. If for some reason you halt your 72t distributions in the future, penalties plus interest could result.