Rule of 55 vs 72(t): Which is Better For Early Railroad Retirement?
Video Retirement Financial Planning TaxesTranscript:
What is the best way to build that early railroad retirement income bridge? Welcome everyone to another edition of the Highball Advisors Railroad Retirement Whiteboard. My name's John McNamara of Highball Advisors, and today, we're going to talk about those railroaders, that might have 30 years and they're before the annuity starts, before 60. I have a lot reach out to me, "Hey, I'm 55, I'm 56. I got my 30 years." I've had some people reach me at 49, "I got my 30 years at 49 years of age." It's unbelievable. So how are you going to build that railroad retirement, that income bridge, before the annuity starts? You say, "Okay, I'm done with the railroad, I got to leave. But obviously, I need income."
There's a lot of different ways, and I've done videos on that. So this one, I thought I'd talk about the rule of 55 and the 72(t) rule. Those are two ways of possibly building a retirement income bridge. So let's just go through, high level, what both of them are and then, the pros and cons. All right?
So the rule 55 is, when you leave a job on or after the age of 55, you can start. You can't roll the money over to the IRA. This is from your 401k, right? And so, you can start taking distributions from your 401k. All right? But it's only the recent 401k. So if you have multiple 401ks from different employers, it's only the recent one that you can take from the rule of 55. And what does that mean? So normally, you wouldn't be able to take any money out unless you reach the age of 59 and a half. With the rule of 55, they're saying, "Oh no, you could take it out at 55 from your 401k, but only your recent employer, and there will be no 10% penalty."
Now, they're going to withhold 20% income tax on any distribution, as you distribute it out. So that might or might not be a good number, we don't know until you look at it, and the plan has to allow it. The plan has to allow for the rule of 55. Make sure that you get that out. I have to believe that they would. A lot of railroaders, like I say, can leave. So that's the rule of 55. Now, the other one is the rule of 72(t), and that's just an IRS code or whatever. So it's a tax penalty free withdrawal from an IRA or 401k. So it doesn't limit, like this one, where it's only the last previous employer. From IRA or 401K as a series of substantially equal periodic payments. Great IRS terms. Okay? Now, what's interesting about that is you could start that at any age. Here, you have to wait for 55, and then, this one, you could start at any age.
And the way it's going to work is you're going to set it up. There's a formula. I won't get into the formula, but basically, you're getting, it's the same amount of payments every month until at least five years. It has to for five years or until you're 59 and a half, whichever is longer. So if you start at 57, you got to go to 62, and then, you might say, "geez, I'm drawing down my IRA or 401k, and I start my annuity at 60. So this might not be good." So those are the things you have to think about. So here's some of the pros and cons. The rule 55 allows withdrawals of any amount. So this is a set amount. Every month, you're going to say, "I set it up, so I have X amount every month." And this is any amount that you want.
So if you need a lump sum for something, rule 55 might be the way. And then, the 72(t) payments must be continuous for five years versus the rule 55, where you can say, "I'll stop it. I can stop at any time." So going back to this, what I was saying, you might have to go out till 62, depending upon when you start the 72 distribution, or 63, who knows? Here, at rule 55, you just stop it. So that's something to think about. And then, there's really harsh penalties on the 72(t). If you miss any of these payments, there's a 10% penalty on, not only those payments, but all the previous payments that you made. So you have to go the five years or the 59 and a half, whichever is later. So that's very important. So the point I'm saying here is, if you said, "I'm going to start this at 52 and go five years." No, I got to go out to 59 and a half, so I got to do seven and a half years of these payments.
So that's something to think about. But anyway, I just wanted to bring up to your attention two possible ways of building that early railroad retirement bridge, multiple other ways. But you have your 30 years in, you have a lot of options now, and these are the type of things that you want to be thinking about, if you say, "I got my 30, I'm looking to leave the railroad." All right? So I hope you found this video helpful. If you're at or near retirement and you want to think about building that early railroad retirement bridge, reach out to me. We'll go through the boarding for railroad retirement process, see what that looks like. Click on the subscribe button to subscribe to my YouTube channel. I really do appreciate that. Share it with other railroaders. That's great. And click on the notification bell to get the latest video. So until next time, everyone, please stay safe, stay on track, and take care. So long, everybody. Bye.
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