Withdrawal from 401K Retirement Account

In most all cases, an early withdrawal from 401K or traditional IRA accounts (before the age of 59-1/2) will result in a 10% penalty tax and you must pay income tax on the withdrawal. There are a few exemptions, including these circumstances:

a) if your unreimbursed medical expenses are more than 7.5% of your adjusted gross income.
b) if you are disabled.
c) if the amount you withdraw is more than your qualified higher education expenses.
d) if your withdrawal is used to buy, build, or rebuild a first home.
e) for others, check IRS publication 590

One of the "other" early withdrawal from 401K exemptions covered by e) above is to take assets out of your retirement fund under a SEPP program. SEPP stands for "Substantially Equal Periodic Payments." You can not utilize the SEPP program while you are still employed by an employer who provides an employer-sponsored qualified plan (including such things as profit sharing and 401(k) plans). If you own an IRA, you may start a SEPP program at any time.

This option comes in very handy for someone who is laid off from a job through which they had a 401(k) retirement fund. Once the fund has been rolled over into an IRA or other qualified plan, you can begin immediately to draw penalty-free early withdrawal from 401K funds that have been rolled over into an IRA. So by the time your unemployment checks have run out, and things are beginning to look desperate, you will have this option to fall back on for the cash needed to pay the bills while you continue to look for work.

A SEPP payout can be calculated in three different ways. You should discuss these methods with your tax advisor to determine which method works best for you. These methods are:

· Amortization method. The annual payment under this method is determined using the life expectancy of the taxpaper and his beneficiary and a chosen interest rate. The annual payment will be the same for each year that you are in the program.

· Annuitization method. While similar to the amortization method, the amount paid out under this method is determined by using an annuity based on your age, your beneficiary's age, and the interest rate chosen. Again, the amount paid out each year will be the same. An IRS-provided mortality table is used to determine the payout.

· Required minimum distribution (RMD) method. The amount paid out each year under this method is calculated by dividing the account balance for that year by your (and your beneficiary's) life expectancy. The annual payment is figured again each year and will, therefore, change from year to year. This method takes market fluctuation of an account balance into account.

Some things to consider before starting a SEPP Program.

- You are required to continue a SEPP program for a minimum of five years (the minimum may even be longer than 5 years if you are under the age of 44). So if you are younger, or if you are sure that your need is a short-term need, this may not be your best option.

- You may not make any contributions to your account, or take any other distributions from your account, while you are receiving benefits under a SEPP program. You may transfer the full account balance from one financial institution to another, but you may not make any partial transfers.

You can find additional information on this program by talking to your tax consultant, checking the IRS website for information regarding the SEPP program , or various other websites which provide information on the topic, such as 72(t) on the Net.