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COP & P66 Retirees Engineer Financial Bridge to Retirement | Baird Retirement Management

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September 02, 2016

Sep 02, 2016

3:23 AM America/Chicago

Retiring from the Oil & Gas Industry,
You May Not Need to Wait Until 59 ½:

The Power of Engineering the Financial Bridge
Written by: Stephen “Moe” Allain, Vice President, Baird Retirement Management

Many people who are employed in the oil & gas industry have a substantial amount of their financial wealth tied up in their 401k/Savings Plan with their current employer. If you are severed from your employer after you turn 55, but before you turn 59 ½, or leave your employer for a better career opportunity, you may be concerned about surviving financially during this transition.

If you are at least 55 years old when you leave your old employer, you will not have to pay an early distribution tax of 10% on any distribution you receive from your former employer’s qualified retirement plan (You will have to pay income tax on it though.) This exception applies only if you are between ages 55 and 59 ½. After age 59 ½, the early distribution tax doesn’t apply to any retirement plan distributions, whether from a former employer’s qualified plan or a Traditional IRA.

Technically, you don’t even need to be 55 on the day you leave your old employer, as long as you turn 55 by December 31st of the same calendar year. This exception does not apply to IRAs. The exception applies only to distributions you receive after you have separated service, or terminated your employment with the company that sponsors the plan.You do not have to retire permanently. You can go to work for another oil & gas company, or even return to your old company as a consultant.

Here is one example of how the bridge might work:

  • Currently 57 years old, living expenses are about $100,000 per year
  • Recently were severed from your current employer after 27 years, when the Kazakhstan assets were sold, and the project terminated
  • Want to continue working/consulting for another 5 years, or so, but have no specific job prospects lined up at the moment
  • Are married, file taxes jointly (MFJ), and in about a 28% tax bracket

By leaving at least $350,000 [2.5 * ($100,000/(1-0.28))] back in your current employer’s 401k/Savings Plan, you have just created your financial bridge to 59 ½. These monies are accessible to you before 59 ½ without any 10% penalty. You’ll want to make sure that the money left behind in your old employer’s 401k/Savings Plan is in the safest, and least volatile, investment choice you have available. After all, this is a sort of a tax-deferredemergency fund, and the last thing you want to do is to take risks with these monies.

After you turn 59 ½, you can always roll your old employer’s 401k/Savings Plan to an IRA account if you end up not using all of your bridging monies. But if you do need these monies, you’ll be glad you engineered your financial bridge, and had the flexibility that came with this bridge.

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