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Hello,
This site is fantastic! I'm going through all the topics and posts and have a few newbie questions.
If I have fund in a 401k that gives me a 30K dividend each year and I auto-reinvest that dividend back into my same 401k (same fund), would it be true to state that this is not considered adding additional funds and would not break the rule of adding or removing money as part of a SEPP plan?
If I have two 401k funds that pay out a dividend and I reinvenst those into a third 401k fund, is that legal and won't break the no add or remove rule? Presume that I put all 3 401k funds in my SEPP universe. Would it be better to just have each fund reinvest in itself to avoid any possible confusion?
I am looking at the Fidelity and Vanguard websites and does anyone have experience with these two companies know if they require a form for doing a SEPP? or can I just say please give me X amount of money and they will notify the IRS of the distribution at year end and I can file the irs form 5329 to avoid the 10% extra tax? I was told both will withhold 20% of any distributed amount prior to 59 1/2 and there no way around this, anyone hear differently?
Thank you
Hello,
Found the answer to my first question via search 'Do Reinvested Dividends Bust a SEPP plan?' Short answer no.
You are correct to first question.
Technically, you can name which 401-K accounts are in your SEPP 401-K UNIVERSE of 401-K accounts. Similarly, you can name the IRA accounts that are in your SEPP IRA UNIVERSE. You cannot include 401-K accounts and IRA accounts co-mingled together in any SEPP UNIVERSE.
Your third question has a terminology flaw. "Reinvesting" by definition means that each FUND within each account "reinvests" its own dividends in the same fund AUTOMATICALLY if you elected to do that. I think that what you are asking is if you can take the dividends in one 401-K account and invest it into a different 401-K account. I would never recommend that be done because each 401-K account is usually with a different fund family, or different broker, or with a different employer. Each of them would be reporting these as "CONTRIBUTIONS" or maybe as "ROLLOVERS" on form 5398 to the IRS each year. A new ruling a couple of years ago limited "rollovers" to 1 per 365 days, unless it was done electronically. I think that you would be asking for trouble, and possible IRS audit, and possibly expensive tax professional intervention, even if the IRS ultimately allowed it.
Why would you want to even consider taking the large dividends from one 401-K, and transferring it to a different 401-K ? Have you considered consolidating the 401-Ks at which firm would accept the other ? Are you trying to balance the amounts in a smaller one with the dividends received by the other one?
You can have 3 separate SEPP 401-K UNIVERSES.
You did not indicate your age, or when you plan to retire. If you plan to retire, or are laid off in the year that you will become 55 before 12/31, you should look into a special tax provision called NUA (Net Unrealized Appreciation of Company Stock). (See explanation elsewhere on this website.) You also did not indicate your expected tax bracket, marital status, and kids, which would be helpful for us to give you more informed responses.
Distributions from IRA accounts (including SEPP plans) do not require federal income tax withholdings, but if none is withheld, then quarterly estimates are required. On the other hand, 401-K plan distributions are required to withhold federal income taxes at 20%, unless it is an electronic direct trustee-to-trustee TRANSFER.
Finally, Fidelity and Vanguard, etc., do not require any paperwork from you to document that you are setting up a SEPP 72-T plan. As a matter of fact, there is no designation on the account(s0 that it is part of a SEPP 72-T plan. Similarly, and surprisingly, the IRS does not require (or want) any documentation when you set up a SEPP 72-T plan. But you better have it if you are ever audited !!!!!
