5 Steps To Retiring Rich (Step 5)

By Nilus Mattive

This post 5 Steps To Retiring Rich (Step 5) appeared first on Daily Reckoning.

Dear Rich Lifer,

This is the fifth of five roadmaps on retirement accounts.

And, boy… I really did save the best for last.

In fact, I’m going to show you two powerful “hacks” that can:

— Get your money out of an IRA at any point… penalty free. Or…

— Leave it in as long as possible for future generations.

Let’s start with getting the money out.

As I’ve explained before, the IRS typically imposes a 10% penalty on people who take money out of 401(k) plans or IRAs before they turn 59 and a half years old.

Yes, there are some exceptions to this basic rule, including:

Contributions made to a Roth IRA
Some 401(k) hardship withdrawals
401(k) withdrawals that use the Rule of 55
Up to $10,000 from an IRA used for the purchase of a home (if you haven’t owned one in the last two years)
Certain IRA withdrawals used for qualified higher education expenses

But by and large, all you will hear is that there is no real way to universally avoid the 10% early withdrawal penalty.

Enter a method called “substantially equal periodic payments” (SEPP). It’s made possible by Section 72(t) of the Internal Revenue Code.

As the name suggests, this will NOT allow you to get all the money out at once.

But it will allow you to withdraw a predetermined amount every month over a certain period of time.

That period must be at least five years or until age 59 and a half, whichever comes later.

Here are two illustrations that show what I mean:

If I’m age 40 and I want to use SEPP, I will need to take the payments until I turn 59.5 years old. That’s roughly 20 years from now.

Meanwhile, if my cousin is 57 and he wants to use SEPP, he will need to take those payments until age 62 … which is past the normal 59 and a half cutoff.

If you go this route, you need to be committed. In fact, the IRS will actually assess penalties on all the money you’ve collected if you decide to abandon your SEPP prematurely.

You do have some flexibility in how you design the payments though. For details on the three methods and other ins and outs, see this document from the IRS.

Who might want to use SEPP?

Well, one great possibility would be a retiree using the payments to fund their life to a predetermined point in the future when another income will kick in. For example, using the SEPP as a bridge to a delayed Social Security benefit filing.

Someone in my age bracket might also consider a SEPP plan to pay their mortgage in the event of a job loss or some other major life event. They could even start contributing to their retirement plan again in the future, which would essentially wash out the overall financial impact.

Ok, that’s retirement hack #1 for today. Now, let’s cover #2.
On the other end of the spectrum, you can use a …read more

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