The answer is yes. Remember, retirement accounts are 100% tax deferred until you start taking withdrawals. Whether you are at, above, or under age 59, 100% of the dollars taken from your retirement account will be added to your adjusted gross income when filing your taxes. If you withdraw funds prior to age 59 without utilizing a known exception, a 10% early withdrawal penalty will be added to the tax liability for those dollars.
So, by taking income through a 72t early distribution plan, you are not avoiding income tax all together, but you are avoiding the 10% early withdrawal penalty tax, which in many cases can be a very significant tax break.
Can I transfer an existing 72t distribution and continue the distributions with a new firm?
As you will see with many IRS rules and guidelines, there are various shades of gray or valid questions that are not specifically addressed. What we must rely on in those circumstances are various private letter rulings that may pertain to your case. In the case of transferring an existing 72t distribution, all signs point to yes and it is often approved.
If the delivering company does not report the transfer correctly and you are hit with a tax bill the following year due to the error, you can file IRS form 5329 providing proof and justifying the transfer, and we have personally seen these cases accepted and rectified.
What will it cost me to set up a 72t distribution?
There are (2) ways we typically work with people, and there are (3) steps that we take:
- We need to become familiar with you and your situation as well as your goals and objectives
- We need to determine the correct payment method and amount to take as well as how to properly structure your accounts based on your unique situation
- We then create, implement and execute a suitable and sustainable Early Retirement game plan
Some people approach us looking for the 72t calculation and investment advice, but prefer to manage the money themselves in their existing accounts. While we don’t recommend this, we are happy to run the calculations, draw up a detailed game plan and provide a proposal that lays out everything we would do if we were managing the account. We do this on a flat fee basis. The fee will depend on the complexity of your situation and the amount of time and work involved. We believe this would be a small investment compared to the thousands and even tens of thousands of dollars it would cost you if your 72t early distribution plan is not properly structured.
If you would like help properly structuring your 72t early distribution, please contact us today.