Any tax experts out there?

[larjoranj]

Interested in tax consequences of withdrawal of a 401k. I've read that you can withdraw your 401k without the 10% penalty as long as you leave your job after you turn 55 and don't roll it into an IRA

My wife would like to retire.She is coming up on 57 and has a decent 401k. She would like to start drawing off that monthly now, rather than waiting til 59 1/2.

Do I understand the rule correctly? There would be income tax on the amount she withdraws but not the 10% penalty?

[salutethehill]

We offer tattoo and relationship advice only.

[Rasputin_Vol]

I've always understood it to be 59 1/2 or older to avoid the 10% penalty. That's not a tax thing, that's more of just how the 401(k) is structured.

So basically, any withdrawal before 59 1/2 will be subject to that 10%.

[Rasputin_Vol]

In any event any amounts are subject to normal taxation as ordinary income. Some employers may disallow one, several, or all of the previous hardship causes. Someone wishing to withdraw from such a 401(k) plan would have to resign from their employer. To maintain the tax advantage for income deferred into a 401(k), the law stipulates the restriction that unless an exception applies, money must be kept in the plan or an equivalent tax deferred plan until the employee reaches 59½ years of age. Money that is withdrawn prior to the age of 59½ typically incurs a 10% penalty tax unless a further exception applies.[4] This penalty is on top of the "ordinary income" tax that has to be paid on such a withdrawal. The exceptions to the 10% penalty include: the employee's death, the employee's total and permanent disability, separation from service in or after the year the employee reached age 55, substantially equal periodic payments under section 72(t), a qualified domestic relations order, and for deductible medical expenses (exceeding the 7.5% floor). This does not apply to the similar 457 plan.

Never knew about that one exception until now. That is interesting...

[Danl]

For early retirees, 72t can be a very good tool. Note that you must take the 72t distribution for at least 5 years.

[Jax_Vol]

Originally Posted by larjoranj

Interested in tax consequences of withdrawal of a 401k. I've read that you can withdraw your 401k without the 10% penalty as long as you leave your job after you turn 55 and don't roll it into an IRA

My wife would like to retire.She is coming up on 57 and has a decent 401k. She would like to start drawing off that monthly now, rather than waiting til 59 1/2.

Do I understand the rule correctly? There would be income tax on the amount she withdraws but not the 10% penalty?

I am not an expert on this topic. And sorry to be the bearer of bad news. First part, she has not yet paid any tax on the money in the 401k. So you are correct...when it comes out, taxes must be paid. The original idea behind the whole 401k approach was to put off paying those taxes until you are older (retired). And therefore, you are probably making less money and in a lower tax bracket.

On the second question, I do not think that retiring will qualify you for that exception. If it did, everyone would be doing it. And therefore, the 59 1/2 age would be moot. Example, if you could retire at 55, get an exception on the 10% penalty, people would be doing that in droves. If she is fired, THEN you might be able to qualify for the exception.

Have you tried googling? if that doesn't work, then it is certainty worth discussing with a tax guy.

I may be 100% wrong

[UTGnome]

Jax, you are never wrong. Just remember that.

[Jax_Vol]

Originally Posted by UTGnome

Jax, you are never wrong. Just remember that.

gnome...you are my anti-wife. because she says that I am always wrong...


But if i find out that i can retire and get into my 401k at 55 without penalty, I am going to be a happy camper!

[vol_in_ar]

thought you were already retired, it's why you can post so often

[UTGnome]

Jax, show her Morris Day's picture. That will prove you are right.

[Jax_Vol]

Originally Posted by vol_in_ar

thought you were already retired, it's why you can post so often

I am just a good multi-tasker....wait, here comes another airplane, better see if one of the runways is clear..I'll be right back

[Jax_Vol]

Originally Posted by UTGnome

Jax, show her Morris Day's picture. That will prove you are right.

None of my ladies wear gloves...




bet you can't name that song!

[UTGnome]

Is it a Prince song? I really hope I am wrong.

[Jax_Vol]

Originally Posted by UTGnome

Is it a Prince song? I really hope I am wrong.

He probably wrote it but he isn't the one who made it into a hit

[UTGnome]

I will just stick with "Oh we oh we oh" running through my head.