www.youtube.com/watch?v=VkFPRAh1vOc

This is kind of a funny little question. About 329 people asked this. “I’m 57½ and I’m retiring from my company. Can I start taking money out of my 401k?”

And the answer to that is so complicated, so before you start making this decision, don’t run out there and do anything that I say without talking to a qualified financial planner.

But let me address it like this:  The IRS says that as long as you’re 55 years of age or older and you retire from the company and your money stays at that company’s 401k, then yes, you can start taking money out without the 10% penalty.

Now let’s say you’re 57½ and you take that money and you roll it over into your own individual retirement account or an IRA for short, can you start taking that money out? And the answer is, again, it’s complicated. If you take money out before you’re 59½, you’re going to be hit with a 10% Federal penalty on top of ordinary income taxes, and your state may also have a penalty on top of that. California has a 2½% penalty.

You can do something, however, called a 72t. That’s the section of the tax code that allows you to take money out of an IRA prior to age 59½ without paying the penalties. Now, in doing a 72t, you’ve got to understand that most CPAs do not understand how this things works, and I’d say even more financial planners have no clue. I’ve actually done them with clients based on their specific goals and specific needs that we needed to do with them, and they are very complex. So complex, in fact, one of my great clients we were doing a 72t with, and they took all the information to their tax planner the next year, and the tax planner said, “oh, Pete did everything wrong. You’re now going to get taxed on that money, the penalty.” And he called me up, flustered, “hey, my CPA says you did everything wrong. This is a great CPA. He knows his stuff.”

I replied, “Did you give him the letter that I gave you?” And he says, “well, no, I didn’t.”

See, one of the things we do, because we realize that most CPAs, it’s not that they don’t know this, it’s that they don’t do it like we do it, and they don’t do it as often as we do it. In fact, most CPAs, this may be the first time they’ve ever even heard of a 72t. We actually give our clients a step-by-step letter saying, give this letter, complete with all this documentation, to your CPA and it walks them through how to fill it out on the tax form so you don’t have to pay the penalty.

Are you ready for this? There’s two questions on your IRS form that allow you to avoid that 10% penalty, but you’ve got to know which two questions they are and how to mark them correctly. And quite frankly, most people just don’t know.

Now, one of the drawbacks of doing a 72t is this:  If you start a 72t, you have to do it for at least five years or until you’re 59½, whichever is later. So what that means is, let’s say you’re 57 years old. You start this 72t, you’re going to have to do that for five years. Not just until you’re 59½ but beyond that another three years, just to comply with the IRS regulations on this.

So it is very complex, how much money you actually get to pull out, because it’s not just, well, I’m going to pull out any amount I want. They’ve actually got a guideline, a formula that you have to follow that says, this is how much you get to pull out, and it’s based on many factors, including your age, how much money you have in the account on a certain date, and what the current mid-term interest rates are.

And if that wasn’t enough to throw you, that’s why I’m saying, most people don’t know how this stuff works, so before you implement that strategy, make sure you talk to a financial planner that knows exactly how it works. If you’re not working with one, feel free to give me a call. My number is 800-990-2734, or you can reach me via e-mail:  pete@petemitchellinc.com.