4 SEPP Questions
L1: 4 SEPP QuestionsThanks to those responsible for this forum
My birthdate is January 1962 & this would be my 1st 72t *New*
The date of the First Distribution would be April or July 5th 2013
1- When I quit my job, I understand I must roll my 401-k into an IRA within 90 days.
Can I roll it into an ‘existing’ IRA ? I only have one, & it’s very small. Just over 10 thousand.
This is held at Fidelity, along with a sizable taxable account.
2- What can I do ‘inside’ the IRA ?
In September of 2011, I started writing ‘covered calls’ on some of the stocks in my ‘taxable’ account.
I wanted to test myself to see how I would do. I’ve exceeded my goals doing this & along with the dividends (I’m only in dividend paying blue chips) I’m generating a nice amount of income.
Could I do this inside the IRA ?
3- This is directly related to question #2:
Are any gains I (may) have still tax deferred ?
If I continue to have the same success with the covered calls, I could more than replace
the amount I’d be withdrawing every year.
4- Which one of these statements is true ?
A- Once started a SEPP must be continued for 5 years, or until you turn 59.5
Whichever comes first
B- Once started a SEPP must be continued for 5 years, or until you turn 59.5
Whichever comes last
2013-01-20 00:58, By: steve, IP: [22.214.171.124]
L2: 4 SEPP Questions1 — I do not think that there is an IRS rule that you “must roll my 401-k into an IRA within 90 days”. However, this might be a provision in your company’s 401-K plan, so check with them. But, you must do a “trustee-to-trustee transfer”, otherwise the 401-K must withhold federal income taxes at the mandatory rate of 20% if the funds are issued in a check payable to the taxpayer. That can cause serious problems if you plan to “roll over” the 401-K into an IRA, because you will have to replace that 20% with other non-retirement monies until you get the refund from the IRS the following year. (and that rollover must be done in 60 days, not 90 days of receiving the check).
2 — You can do virtually any type of investing within an IRA (subject to a few limitations). Remember that dividends received within an IRA are ultimately taxed at 25%-35%, or more, as regular income when withdrawn from the IRA. Short-term Capital gains are taxed at the same regular tax rates when the amounts are withdrawn from the IRA.
3 — Gains within an IRA are taxed only when amounts are withdrawn, regardless how the funds were accumulated.
4-B — once started a SEPP must be continued for 5 years, or until you turn 59.5 Whichever comes last
P.S. If you have employer’s company stock in your 401-K, often the employer’s match is contributed that way, ask the company about its cost basis, and review the tax provisions for NUA (NET UNREALIZED APPRECIATION) which could save a lot of taxes, and would eliminate the need to even roll over these shares to an IRA. (Since you are < 59 1/2, you would be taxed on the COST BASIS, not FMV, of those shares, plus a 10% penalty of the total cost basis of those shares. But if the value has appreciated over the years, this is a fantastic alternative to consider.2013-01-20 03:40, By: dlzallestaxes, IP: [126.96.36.199]
L3: 4 SEPP QuestionsThanks for the replies.
After reading them, I realized I’m in way over my head on this.
I’m going to try and find a professional in my area to help guide me through this.
2013-01-25 19:01, By: steve, IP: [188.8.131.52]
L2: 4 SEPP QuestionsSteve, With regard to your question #1, I believe there is an advantage to keeping rollover (retirement) money separated from non-rollover IRA money, and if I recall correctly, it it because rollover IRAs have higher protection from creditors, etc., than a regular IRA, so if the other IRA is that small, it won’t have much of an impact on your payment amount if kept separate. With that in mind, I would suggest keeping that old IRA separate from a new IRA you open to accept the 401k rollover money. Perhaps someone can better elaborate on the advantage of this strategy.
2013-01-20 04:34, By: Ken, IP: [184.108.40.206]
L3: 4 SEPP QuestionsI believe that this was the case in PA, but is no longer a distinction. Check your state.
One reason to keep the small IRA separate is for possible future emergencies without possibly busting the SEPP 72-T plan.2013-01-20 04:43, By: dlzallestaxes, IP: [220.127.116.11]