Hi All! And I mean all! Today, I’m focusing my column on the spouses and children of our clients. We’re going to talk about Rule 72(t) as well as In-Service Distributions. Rule 72(t) is a ruling issued by the Internal Revenue Service (IRS) that permits penalty-free withdrawals from IRA accounts and other tax-advantaged retirement accounts like 401(k) and 403(b) plans prior to age 59-1/2. The IRS still subjects the withdrawals to the account holder’s normal income tax rate. This rule permits account holders to benefit from their retirement savings before retirement age, through early withdrawal, without the otherwise-required 10-percent penalty. The plan payments must be equal installments. These payments must occur over the span of five years or until the owner reaches 59-1/2, whichever period is longer. There are a couple of calculation methods the IRS uses. The amortization method determines yearly payment amounts by amortizing the balance of an IRA owner’s account over single or joint life expectancy. This method develops the largest and most reasonable amount an individual can remove, and the amount is fixed annually. So, if additional income is needed, and you have assets locked up in a tax-qualified account, you have options.
Now let’s discuss In-Service Distributions. This option is less well known. It allows you to roll over assets from your current employer’s qualified retirement plan to an IRA while you are still working for that employer, assuming your plan permits it and you otherwise qualify for the in-service distribution. This law is relatively new, so not every employer plan allows for it. I have found that at this time, most do. In order to take an In-Service Distribution, you must be at least59-1/2 years old. If you decide to do one of these rollovers, you usually may continue to contribute to your company’s plan and still receive a company match, if any. All plan distributions can vary by specific plan parameters. So, you would need to check with your plan administrator. If no withholding if you’re doing it to roll the funds over to an IRA. This is done to achieve a more appropriate diversification. As we approach retirement, we may want to start divesting ourselves of the limited range of mutual funds within our corporate 401(k)s. Perhaps investing in a portfolio of well-thought-out, goal-driven and predictable, products. Maybe even a portfolio that is actively managed with you in mind.
I hope this helps those of you youngsters over 59-1/2 and are still working. Here’s looking forward to some cooler weather! Stay safe out there!