At 40 the rule is not just a 10% penalty it is actually ordinary income plus 10% penalty. The penalty is based on the income not the after tax income. So 60k withdrawal (5% of $1,200,000)from an ira x 15% = $9,000 paid in ordinary taxes. Then one must take $60,000 x 10% = $6,000. $9,000 plus $6,000 = $15,000 tax on a $60,000 distribution leaving you with
Walaa : $45,000. (It is only that much if you are in the %15% bracket) So what that means is a your 5% distribution only gets you purchasing power of 3.75%.
Of course that deplets your ira by 60k so by age 41 your IRA is only worth $1,140,000 (assuming you do not make or lose any in the market)
The only way to avoid the 10% penalty on an ongoing basis is if you take a 72t distribution which figures your life expectency and gives you a yearly payment. If you try and stop that payment before age 59.5 you are subject to a 50% tax.
Based on those numbers my plan would be to stop working and have your wife work.
