Early Withdrawal Penalty
I'm not sure if you answer pre-sales questions, but here goes.
I am wondering how esplanner handles early withdrawals from a 401k in the particular case of the separation after age 55 exception. I searched your site and found that the user has to enter their own penalties as special expenses if they apply. That sounds good, since no penalties apply in this scenario.
Also, I found a forum post that says it would use equal early withdrawal amounts, assuming SEPP. That would be an unneeded restriction in this scenario since unequal withdrawals are penalty free. The post is from 2006, so if may be out-dated, and I may have missed something else. Thus my question.
How would you handle this scenario?
Thanks, Dan
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Dan,
ESPlanner does not deal with any penalties associated with withdrawing from retirement accounts. We've discussed this issue internally from time to time but the rules that we would have to apply are too complex for us to reasonably provide an interface for them given that ESPlanner isn't primarily a tax calculator. So continue to use the special expenditures to handle retirement account withdrawal penalties.
The 529 plan support to be included in the 01-May-2009 release does deal with tax penalties for un-qualified withdrawals and if we ever implement support for HSAs will deal with penalties for those as well but the rules for applying the penalties are much simpler for 529/HSAs than for retirement accounts.
Best,
Dick Munroe
Thank you Dick, but I must not have been completely clear. I am fine with the way you handle penalties. I was mainly inquiring about the handling of "early withdrawals". I read in a post from 2006 where Larry says that when such early withdrawals are made "THE PROGRAM AUTOMATICALLY MAKES THE WITHDRWALS EQUAL OVER THE WITHDRAWAL PERIOD".
I'm sure you know that in the case where someone is accessing a 401k from a company where employment ended in/after the year they turn 50 they have full access to the 401k without penalties.
So, my question centers around this scenario, and whether/how it can be simulated in ESPlanner (without regard for penalty, but with regard to equal distributions). In this case, does the program allow for withdrawals to be done on a more flexible as needed basis? Am I wrong in assuming the program would not necessarily assume fixed withdrawals if they started after 59 1/2?
Thanks again.
Dan
If memory serves, ESPlanner won't let you access those funds until you reach 59 1/2.
In any event we don't allow drawing from a specific account without drawing from all other accounts (something else we've discussed but I haven't made much headway in persuading Larry yet). You would have to enter special receipts for the company 401k account and not tell ESPlanner about it.
If you did tell ESPlanner about it and you waited until 59 1/2, yes all funds would be drawn smoothly and without penalty.
Interestingly enough, as long as you withdraw smoothly, you can start withdrawing from any 401k at any time without penalty (according to Larry, I haven't done the necessary research yet). So the ESPlanner strategy is kind of belt and suspenders, start after 59 1/2, always withdraw smoothly.
Best,
Dick Munroe
Yes, I agree with Larry, as long as you withdraw smoothly, you can start withdrawing from any 401k at any time without penalty - that is SEPP. But I am inquiring about the smoothness, not the penalty.
The 55 exception allows you to access the 401k "unsmoothly" which it seems would be beneficial for ESPlanner to know and take advantage of. For example, suppose someone had a legitimate special receipt coming in at age 57. They could withdraw from the 401k at 55 & 56 and then stop withdrawals until the special receipt was consumed.
On the surface, the special receipts option looks like a clumsy way for someone to explore the options under the 55 exception scenario, but I'll look into it.
Thanks
It is clumsy, but as I said, ESPlanner doesn't account for the myriad possibilities of 401k withdrawals and assumes that you can only withdraw smoothly and under "normal" retirement conditions. If you're arguing for ESPlanner to include these exceptions, I can put it on the list (actually it's been on the list for a number of years), but don't hold your breath.
We could, at some future date, change the way we handle IRAs/401ks and, as I've said, have discussed this at some length internally but have no plans to make these changes soon.
Having said that, the change most likely to happen (no time frame) will be the ability to have "non-smooth" withdrawals from your retirement accounts (once you have started withdrawing, of course) but even that is currently up in the air.
Best,
Dick Munroe
Thanks Dick - I appreciate your taking the time. Actually, I'm not arguing for any changes yet ... that would be presumptuous since I have not bought the program yet. :) But I do plan on giving a buy and a serious workout before the month is over. In the mean time, I'm just trying to raise my understanding.
Your comment about "the ability to have 'non-smooth' withdrawals from your retirement accounts (once you have started withdrawing, of course)" is my main interest.
If I am thinking of it correctly, several things ... like a house being paid off, or an inheritance, or a pension becoming available ... could trigger the desire to cut back on 401k account withdrawals that have already began. This is true even in "normal" post-59.5 circumstances (in other words, without my special over-55 scenario). So if ESPlanner, as you say "assumes that you can only withdraw smoothly and under 'normal' retirement conditions", it makes sense to add "non-smooth" withdrawal capability. I am glad that is on the "most likely to happen" list. Having said that, it may be a fairly natural and/or relatively easy next step to add an option to the UI for the 401k account that allows the user to specify that "non-smooth" can start at 55 for that account. Still, I'm not suggesting that ... yet. :)
Thanks again.
Yeah, that's the thrust of my argument internally. You plan to withdraw smoothly from beginning to end of your retirement accounts and then you have an "oh shit" moment of some kind and you need a chunk of cash.
I would like ESPlanner to be able to model that "oh shit" moment.
The problem with the non-smooth starting at 55 is the tax consequences. Ideally we would deal with those (as we do for non-qualified 529 withdrawals (next release, you havent missed anything)) but the rules are obscure and complicated and we have other things on our plate that are probably more useful in the shorter run to our client base (company policy not to reveal such things, you'll just have to wait). So its not likely (not impossible either) that grabbing a chunk of change from your retirement accounts prior to 59 1/2 will be possible.
The special expense/expenditure mechanism is the mechanism of last resort for these sorts of hacks and will continue to be so until we get around to implementing every possible rule and regulation for the SSA, IRS, etc (probably not in our lifetimes).
Best,
Dick Munroe