How to Take Equal Periodic Payments From a 401(k) Without a Tax Penalty
Under normal circumstances, you will face a 10 percent tax penalty if you choose to take money out of your 401k early. But, if you roll the money in your 401k over into an IRA account, you can set up substantially equal distributions under the 72t section of the tax code. These substantially equal distributions allow you to escape the 10 percent tax penalty that would otherwise apply, although you will still be subject to ordinary income taxes on the money that you withdraw.
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Instructions
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Roll the money in your 401k plan over into a self-directed IRA. Typically you cannot roll the money in your 401k into an IRA until you leave your current employer. To roll the money over, contact the administrator that you want to use for your IRA and request a transfer form. Complete the transfer form, including your 401k account number, name and Social Security number. The IRA administrator will take care of getting the 401k transferred without a tax penalty.
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Contact the administrator of the self-directed IRA and inform her that you wish to make substantially equal distributions under the section 72t rules. The administrator will help you determine exactly how much you can withdraw without incurring a penalty. The IRS uses a specific formula to determine the permitted withdrawal amount, so it is a good idea to consult a tax accountant or CPA before getting started.
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Keep copies of all paperwork related to the 72t distributions. You will need this documentation in case any questions arise about the distributions that you are taking.
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Take a distribution from your IRA each year, using the same formula established by the IRS. It is a good idea to have your accountant or tax preparer determine the permissible distribution. If you withdraw too much, you could be subject to a 10 percent penalty in addition to ordinary income taxes.
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