SEPP from 401K? Annual Recalculation?

L1: SEPP from 401K? Annual Recalculation?I have two questions.
Can you take SEPP from a 401K or do you have to roll the 401K into an IRA first?My 401K has a fixed income option based on long-term contracts with insurance companiespaying a locked in 7%. I’d rathernotroll over to an IRA where I’d be lucky to get 2%. I’m aware of the 20% withholding requirement, but if I take the annual withdrawal just before yearend, wouldn’t I be able togetit refunded as soon as I file my taxes in early February?I’m looking at taking annual paymentsof about $25Kwhich would represent our total taxable income (and cover our living expenses) and in our tax situation, I’d oweno taxes. This seems to good to be true. Earning the fixed 7% on my 401K balance would throw off more than the $25K/yr and I could withdraw the money free of income tax and the 10% penalty.Please let me know if I’m missing something here.
Do I need to get a private letter ruling if I’d like to use annual recalculation using the amortization method? I’m only 42 so I’m concerned about inflation between now and when I’m 59 1/2. Has someone already got a favorable PLR regarding this under the new rules? Assuming the answer is yes, how big a risk would I be takingby relying on someone else’s PLRin order to save the expense and time of gettingmy own PLR?
Thanks in advance for any light you can shed on these questions.2003-08-10 08:52, By: Garry, IP: [127.0.0.1]

L2: SEPP from 401K? Annual Recalculation?Hello Garry:
See my comments below:
Can you take SEPP from a 401K or do you have to roll the 401K into an IRA first?
You can take SEPP distributions directly from your 401(k) account. However, let’s cover some basic requirements first: one, you must be separated from your employer; e.g. quit or fired; (2) Your specific 401(k) plan must support periodic distributions — this is a plan specific election so check with your plan administrator if you have not already done so.
My 401K has a fixed income option based on long-term contracts with insurance companiespaying a locked in 7%. I”d rathernotroll over to an IRA where I”d be lucky to get 2%. I”m aware of the 20% withholding requirement, but if I take the annual withdrawal just before yearend, wouldn”t I be able togetit refunded as soon as I file my taxes in early February?I”m looking at taking annual paymentsof about $25Kwhich would represent our total taxable income (and cover our living expenses) and in our tax situation, I”d oweno taxes. This seems to good to be true. Earning the fixed 7% on my 401K balance would throw off more than the $25K/yr and I could withdraw the money free of income tax and the 10% penalty.Please let me know if I”m missing something here.
Provided you comply with my comments above, it would seem to make sense to keep your funds in the 401(k) plan. Generally, I also think you have a correct handle on the tax situation.
Do I need to get a private letter ruling if I”d like to use annual recalculation using the amortization method?
I think so. Unfortunately, Revenue Ruling 2002-62 uses the word “fixed” about 1/2 dozen times so that we all beleive that “annually recalculated” SEPP plans are at least temporarily off the table. However, I also think a PLR has a good chance of succeeding on this issue.
I”m only 42 so I”m concerned about inflation between now and when I”m 59 1/2. Has someone already got a favorable PLR regarding this under the new rules? Assuming the answer is yes, how big a risk would I be takingby relying on someone else”s PLRin order to save the expense and time of gettingmy own PLR?
To the best of my knowledge there have been no PLRs on any 72(t)(2)(A)(iv) issues since the issuance of rev. rule 2002-62. That being said, on the whole issue of “reliance”, you may not rely on some one else’s PLR. However, when one sees the same issue come up in 3,4 or more PLRs then one can rely upon the group as having set precedent as to the Service’s position on an issue. Unfortunately, this has not occurred yet.
TheBadger
wjstecker@wispertel.net

2003-08-10 09:32, By: TheBadger, IP: [127.0.0.1]

L2: SEPP from 401K? Annual Recalculation?Thank you so much for your quick and thoughtful responses to my questions.
I am no longer working for the company where my 401K funds are and they do allow distributions.Please let me know if you see any problems in my plan which follows. If I choose tobegin taking SEPPs, I would probably take my firstwithdrawal on 12/1 (using the amortization method) so there would not be much delay in getting the 20% withheld back in tax refunds. As I understand it, I coulduse 120%of the mid-term rate published in either October or November, and would need to use my balance as of 12/1 and my age as of the end of the year.I would then continue to take an annual withdrawal equal to my initial withdrawal each12/1.Have I overlooked anything?
What is the best way to monitor PLRs? I’m not in a big rush to start my SEPPs (I could wait as long as three years). Ideally I’d likeinterest rates to increase and the IRS to publish several favorable rulings on allowing recalculation. Ilove this web site. It is wonderful! Thank you.2003-08-10 15:57, By: Garry, IP: [127.0.0.1]

L2: SEPP from 401K? Annual Recalculation?

As I understand it, I coulduse 120%of the mid-term rate published in either October or November, and would need to use my balance as of 12/1 and my age as of the end of the year.I would then continue to take an annual withdrawal equal to my initial withdrawal each12/1.Have I overlooked anything?
Sounds good to me.
What is the best way to monitor PLRs? I”m not in a big rush to start my SEPPs (I could wait as long as three years). Ideally I”d likeinterest rates to increase and the IRS to publish several favorable rulings on allowing recalculation. Ilove this web site. It is wonderful! Thank you.
You can monitor PLRs at least two ways:
(1) You can just stay tuned in here as several of us usually have our ears to the ground & will publish a PLR or a summary of it as soon as we hear fo it.
(2) Go to http://www.irs.gov/foia/lists/0,,id=97715,00.htmlfor the IRS official website of PLRs, GCMs, TAMs, etc. It takes a while to load as it is loading a complete index before the page opens up.
Regards interest rates, I think you will see at least a moderate rise in the AFRs as market rates have been up 75bp over the last several weeks.
We will have to wait and see if and when the IRS rules on annually recalculated SEPP plans. It may be 2 weeks or 2 years. Couple of things to keep in mind: (1) if it is really important to you; go get your own PLR (the ultimate get out jail free card); (2) If you start a fixed plan this December & the IRS rules favorably afterwards, you are stuck with your original plan and you will not be able to migrate to a recalculated plan.
TheBadger
wjstecker@wispertel.net

Edit2003-08-10 17:28, By: TheBadger, IP: [127.0.0.1]

L2: SEPP from 401K? Annual Recalculation?I’d like to see the correct response for Garry’s question. Thanks2003-08-12 05:47, By: dan, IP: [127.0.0.1]

L2: SEPP from 401K? Annual Recalculation?Dan – which question are do you feel needs additional clarrification?2003-08-12 05:55, By: Gfw, IP: [127.0.0.1]