Win the Early Retirement Tax Challenge

Physician's Money DigestApril30 2004
Volume 11
Issue 8

If you are a physician-investor whoplans on retiring before age 59 1/2,you will need to make some importantdecisions. That's becausevarious options exist for early retirees.

Exception to the Rule


If you retire prior to age 59 1/2, youwill need to begin taking paymentsfrom your retirement savings when youstop working. If you withdrawa portion of your savings prior toage 59 1/2, you may have to pay a 10%early withdrawal IRS penalty. Also, ifyou take payments directly from youremployer-sponsored plan, your employeris required by law to withhold 20%of the amount you withdraw for federalincome taxes.

While penalties and taxes may takea bite out of your retirement savings,there is an exception to the 10% penaltyrule. This exception is known as the55 and over exception, and it is especiallyhelpful if you are nearing age59 1/2 and need a limited amount ofmoney for living expenses. The followingis an example of how the 55 andover exception works.

Advantage of Exception

Let's assume you are a 58-year-oldphysician who has $100,000 in a retirementplan. You will have unrestrictedaccess to your funds in another yearand a half, but you need $10,000 thisyear. Using the 55 and over exception,you can avoid the 10% early withdrawalIRS penalty by rolling $90,000 fromyour employer-sponsored plan into atraditional IRA. You will then keep theremaining $10,000 penalty free. Ofcourse, your employer will still have towithhold 20% of the funds for federalincome tax purposes.

Another way to avoid the 10% earlywithdrawal IRS penalty, especially ifyou are under age 55, is by taking aseries of periodic payments (oftenreferred to as 72(t) distributions) fromyour retirement plan or IRA. Using thismethod, you are required to take substantiallyequal payments once a yearbased on IRS life expectancy tables. Inorder to avoid the penalty, the paymentsmust continue for 5 years or untilyou reach age 59 1/2.

Flexibility and Control


Many retirees who roll over theirretirement plans into an IRA use 72(t)distributions to gain more flexibilityand control over their retirementaccount investments as well as toreceive a predictable stream of income.Although you can begin taking 72(t)distributions at any age, individualsyounger than age 50 must make longertime commitments. Longer timecommitments sometimes create a needto alter the amount of payments, asretirees will have to spread their fundsover more years.

Tax Payments Deferred

If you don't need money right awayto meet your expenses, it's not mandatoryfor you to take distributions fromyour retirement accounts until youreach age 70 1/2. If this is the case, youmay want to consider continuing todefer paying taxes on the money byrolling all or part of it into an IRA.

Other options that may allow youto defer paying taxes include movingyour funds to another qualified retirementplan or leaving the funds in youremployer's retirement plan a bit longer.Talk with your financial advisor aboutwhat opportunities are available so thatyou can live a comfortable and securelife in retirement.

Joseph F. Lagowski is vice president, investments, and a financialconsultant with AG Edwards in Hillsborough, NJ. He welcomesquestions or comments at 800-288-0901 or This article was provided by AGEdwards & Sons, Inc, member SIPC.

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