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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4540
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I have a question on withdrawing from a retirement account.I

Resolved Question:

I have a question on withdrawing from a retirement account.
I have a 401(K) with my employer for the last 20 years or so.
The amount is more than 500K.

1. Can I leave my 401(K) with my current employer if I retire?
2. When can I start withdrawing from my 401(K) without incurring a penalty?
3. When can I start taking equal distributions without incurring a penalty? For about 500K what's the maximum distribution I can take?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Lane :

Hi there ... glad to see you came back!

Lane :

1. Can I leave my 401(K) with my current employer if I retire? ... Yes, by law you can

Lane :

2. When can I start withdrawing from my 401(K) without incurring a penalty? You can withdraw money as early as age 55 .. (but only if you have separates from service ) ... this does not apply to IRAs, only workplace retirement plans)

Customer:

Can I start taking withdrawals from age 55 from my 401(K) without incurring any federal or state penalty?

Lane :

Have you left the company?

Customer:

By "sepates from service" do you mean retirement?

Lane :

... simply means not working there any more

Customer:

If I change jobs, does this rule still apply?

Lane :

retirement is something YOU define ... it's age 55 if you've left the company for workplace plans .... and age 59 and 1/2 for all other plans and Not having left the company yet

Lane :

yes, it's whether you have separated from the service of the mployer sponsoring the 401(k) plan

Customer:

So, if I resign my current job at 55 but work for another employer (and possibly may have another 401(K)) can I still withdraw from my current 401(K) without incurring any penalty?

Lane :

That's exactly right ... make sure that the money coming from the old plan does not get distributed until you have documentation of 2 things .. (1) that you have already separated from THAT company... and (2) that you have already turned 55

Lane :

The money is still added to your income for tax purposes... but no 10% penalty

Customer:

Another scenario - If I resign from my current employer before age 55, and work for another company, can I start withdraw from my current 401(K) after I reach age 55?

Lane :

No ... age 59 and 1/2 if you're still working there

Lane :

(to waive the 10% penalty)

Customer:

I am referring to my current 401(K) - not my future 401(K). Can't I withdraw from my current 401(K) after I reach age 55?

Lane :

If you have separated from service from the company that sponsors the retirement plan and are age 55 ... other issues, like what you do at another company are not relevant (make sense)?

Lane :

I should say that a little differently ... the 10% penalty is waived IF



  • The distribution is made to an employee after separation from service if the separation occurred during or after the calendar year in which the employee reached age 55.

Customer:

OK. Got it. Is there a reliable calculator that helps me calculate how much distribution can I take without incurring tax penalty?

Lane :

amount doesn't matter ( what will matter there is your tax bracket) ... the more you take in one year the higher your marginal tax bracket will be (tax on that last dooar you earned - or distributed- in a tax year

Lane :

you may want to be aware of your brackets and other income so that you can see when taking a certain amount out will push you into a higher bracket for the year

Lane :

For example:







































For a single filer



Tax rate



taxable income from $0 to $8,925,



10%



taxable income over $8,925 to $36,250



15%



taxable income over $36,250 to $87,850



25%



on taxable income over $87,850 to $183,250



28%



on taxable income over $183,250 to $398,350



33%



on taxable income over $398,350 to $400,000



35%



on taxable income over $400,000



39.6%


Lane :




































For a Married filing jointly filer



Tax rate



on taxable income from $0 to $17,850



10%



on taxable income over $17,850 to $72,500



15%



on taxable income over $72,500 to $146,400



25%



on taxable income over $146,400 to $223,050



28%



on taxable income over $223,050 to $398,350



33%



on taxable income over $398,350 to $450,000



35%



on taxable income over $450,000



39.6%


Lane :

So, lets say that you made 50,000 in earned income for a tax year .... If you distributed another 50,000 from the 401(k), you had 100,000 of taxable income that year

Customer:

I am referring to the early withdrawal penalty and not the tax. I am aware that tax on the 401(K) withdrawal depends on the income bracket I am in

Lane :

There penalty has nothing to do with amount ... IF you are subject to the penalty, for one of the reasons we have been discussing the 10% penalty will be applied to the amount distributed that year (in addition to the amount being added to you regular income for tax purposes)

Lane :

Generally age 59 and 1/2, death, disability, separating from service after age 55, and a series of substantially equal and period payments .... are the things that waive the 10% penalty ... on whatever amount you pull

Customer:

So, in this example, I have to pay 5,000 (10% of 50,000). Right?

Lane :

if the penalty applies, yes that's right

Customer:

So, coming to the IRSs allowable equal distributions. Does this help in any way reduce taxes? If not, what's the purpose of this IRS rule?

Lane :

if you've separate after age 55, however, the withdrawn amount is just added to your other income for the year (no additional 10% penalty) ... just to be sure we're on the same page

Lane :

OK that'sd another way to waive the penalty IF you'd be subject to it ... there is a formula where you are essentially taking out the balanace over life expectancy ... however....

Customer:

Yes. I was referring to that

Lane :

and as long as you stick with that amount until age 59 and 1/2 (OR 5 years, whichever is LONGER) the penalty is waived on THOSE distributions

Lane :

Here's a calculator for that (may not be as much as you'd like to pull)

Lane :

I think we've handled the fourth question already .. as long as the balance is all vested .. you can pull as much as you'd like ... but again the taxation of that (and potential penalties) ... ALWAYS taxable (unless some of the money was in a designated roth account) ... and the any penalties based on those factors we've been discussing

Lane :

Questions?

Lane :

still with me here?

Lane :

We started this at 1:57 ... It is now 2:37 (ea) If I don't see you coming back into the chat, I'll move us to eh "Question and Answer" mode ... Maybe that will help ... (We can still continue our dialogue there, .. just not in real-time as we can here)

Lane :

Please let me know if you have questions at all

Lane :

OK, I have a meeting at 2:45 ... but will check back .. will also wtch the iPhone to see if you need something quickly

Lane :

Again let me know any questoins at all

Lane :

Lane

Lane :

If this has helped, I would appreciate a feedback rating of 3 (OK) or better (excellent, is ideal)… That's the only I get credit for the work.


However, if you need more on this, please come back here, so you won't be charged for another question.

Customer:

Sorry I had to go to a sudden meeting. Thanks, XXXXX XXXXX was very useful.

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4540
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thanks much for the rating!

If you'd like to ask ME another question, you can do that here: Lane

Thanks again,

Lane

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Lane
Lane
JD, MBA, CFP, CRPS
3667 Satisfied Customers
Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986