By Mike Miles
June 3rd, 2013 | Uncategorized
Q. I was downsized when I was 46 and rolled over everything into a 72(t). I am currently withdrawing from it monthly as I cannot find a job that pays enough to live off of. I am in a situation now where I need some extra money to clear off some debt and buy a new car. Can I take a one-time withdrawal from my 72(t), in addition to my monthly? If so, what are the tax implications?
A. You may not change the annual withdrawal scheme as calculated and required under 72(t). If you do, the 72(t) exception to the early withdrawal penalty will be voided and you’ll be obligated to pay the early withdrawal penalty on all withdrawals taken under the exception, to date.
February 20th, 2013 | Uncategorized
Q. I am an air traffic controller who is retiring in two months at age 48. I have an outstanding Thrift Savings Plan loan for about $9,000. What happens if I don’t pay this off before I retire? Do I pay the 10 percent penalty, along with it being shown as income? Does this affect my monthly withdrawal from TSP using the 72(t) rule? Also, can I take a one-time partial lump-sum withdrawal and pay the 10 percent penalty without it affecting my monthly withdrawal?
A. If you don’t repay the loan within the grace period after you retire, it will be declared a taxable distribution and you will owe penalty and taxes on the income. This does not affect your ability to initiate monthly distribution payments to satisfy the 72(t) rules on the remaining balance. Taking a partial withdrawal does not impair your ability to take automatic monthly distributions, which are considered a form of full withdrawal.
January 7th, 2013 | Uncategorized
Q. I am a 47-year-old air traffic controller. I have completed my 25 years of service and retired Dec. 29. I have been investing in the Thrift Savings Plan my entire career. I want to draw a monthly payment of $1,500. If I do this, is it considered an annuity which I can claim under 72(t)? Or would it be better to buy an annuity equaling the amount I need and let the rest ride until I am 59½?
A. The rules for satisfying the 72(t) exception to the early withdrawal penalty are complex and strict, so you should be careful before beginning. You must take the exact amount calculated using one of three approved methods. If you over- or under-withdraw, you’ll be subject to the penalty. Buying an annuity will satisfy the requirement, but, with interest rates so low, it’s not an attractive time to make this commitment. If you’re not sure what to do, you should seek trustworthy professional help.
December 10th, 2012 | Uncategorized
Q. I am retiring from the Army after 22 years of service and I am 45 yrs. old. Can I start withdrawing from the Thrift Savings Plan and avoid the early withdrawal penalty by taking a series of Substantially Equal Periodic Payments? How does that work? My life expectancy is 37.7 more years, according to the Internal Revenue Service, so is that the number of years my funds can be distributed? If so, do I then divide what I saved by 37.7 and again divide by 12 to see what my monthly payments would be?
A. You may avoid the penalty by taking a series of Substantially Equal Periodic Payments, but the rules are complicated and strict, with the penalty for violating them potentially large. I suggest that you consult with a CPA or other qualified tax preparer, who will prepare and stand behind your returns during the distributions, to run the calculations for you. There are actually three options for calculating the distribution amounts, and they typically produce a wide range of values. If you insist on doing it yourself, you can start the learning process by conducting an Internet search on “72t distributions,” but the IRS won’t care if you relied on bad information or methods that led to mistakes.
November 26th, 2012 | Uncategorized
Q. For about 10 years, I have been taking money out of my IRA using the Rule 72(t) with no issues. I am 58 years old and am planning to continue doing this well past when I turn 59½.
Our daughter has some very high college expenses. I understand you can take funds out of an IRA to help pay for eligible college expenses (tuition, fees and books) along with room and board if the student is enrolled at least 12 credit hours. Can I take money out of my IRA for educational purposes while still taking money out using Rule 72(t)? I do not run the risk of running out of money as, even with the 72(t) withdrawals, the account balance continues to increase.
A. This is really a question for your tax preparer, but to the best of my knowledge, any deviation from the 72(t) withdrawals before their term is up and you’ll trigger the early withdrawal penalty.
November 19th, 2012 | Uncategorized
Q. I am a firefighter with a county fire department in Florida. As such, I am part of the Florida Retirement System in the special risk class. I started my career early and will be eligible for retirement with full benefits and no FRS penalties by age 48. (This is 25 years of service.) However, because of the Internal Revenue Service penalty for retiring before age 50, I would receive a 10 percent tax penalty in addition to the normal taxes I will pay on my retirement income. I understand that I will receive the penalty of 10 percent. However, I want to know whether that penalty goes away after I have reached age 50, or if it continues until I am 59?
A. The early withdrawal penalty rules will continue to apply until you reach age 59½. You can avoid the penalty by withdrawing from your Thrift Savings Plan account in a series of Substantially Equal Periodic Payments under section 72(t) of the tax code.
October 1st, 2012 | Uncategorized
Q. If I agree to make Substantially Equal Periodic Payments available under Internal Revenue Service code section 72(t) from my TSP, may I do so before I retire and avoid the 10 percent penalty? If it matters, I am a federal law enforcement officer who will have 25 years of service before age 50.
A. No, since you’re not allowed to initiate monthly payments before you retire. The 72(t)-compliant distributions will avoid the early withdrawal penalty whenever they are initiated, however.
August 24th, 2012 | Uncategorized
Q. I made the costly mistake of rolling over my Thrift Savings Plan into a traditional IRA. I had to file a Form 72(t) to take out payments until I reached age 59½. Then I moved to another firm, filed a new 72(t), and now I violated the original 72(t), and take a 10 percent retroactive penalty.
A. I’ve written many times about the reasons not to roll your TSP account over to an IRA. This illustrates one of them — that you may be giving up penalty-free access to your funds. I’ve also written many times about the pitfalls of 72(t) withdrawals, how strict the rules are and how stiff the penalties can be for violating those rules. See, I wasn’t kidding!
December 20th, 2010 | Uncategorized
Q: I am planning on retiring next month when I turn 50. I would like to take monthly installments based on the IRS life expectancy tables to avoid the 10 percent penalty for early withdrawal. Would I still be able to make a withdrawal for my son’s college fees and still avoid the 10 percent penalty?
A: You’re planning to use the life expectancy method for calculating withdrawals that will satisfy the exception to the early withdrawal penalty. This exception is allowed under IRS code section 72(t). One of the requirements for meeting this exception is that exactly the correct withdrawal amount must be taken each year, no more, no less. You can find more information from the IRS here.
November 27th, 2009 | Uncategorized
Q: I have recently taken Voluntary Early Retirement from the Postal Service as of Oct. 31, 2009. I want to withdraw money from my Thrift Savings Plan account under the 72(t) section, but am having difficulty filling out the TSP 70 form correctly. I want to do it right the first time so that my case is handled properly and I do not have to encounter any complications later on. Can you guide me on how to fill out this form correctly? I turn 55 on Dec. 2, I am married, and my TSP balance is approximately $400,000.
A: The form includes very specific instructions for completing each section, so I’m not going to reprint them here. You’ll need to decide which 72(t) withdrawal option you’re going to use and then fill in item 23 of the form accordingly. If you’re not sure how to calculate the various 72(t) options, I suggest that you engage a certified public accountant to help you.