401k and 72t
L1: 401k and 72tI am starting to look at 72t
I have a 401k balance about $520K in a former employer 401k fund.
I am 53 dob : 09/08/1964 US citizen planning to move oversea and become Non-US resident but keep US citizenship. Perhaps looking at starting first distribution next year 01/01/2018.
My 401k company wants to force me out, either by rolling over to an IRA or cash out.
Because of some regulation FATCA, patriot ACT over non-us residents i will not be able to find another institution that would host my tax deferred fund hence the 401k company is telling they will send me a check of my full balance minus huge tax withholding and 10% penalty.
I am looking for options;
Would someone know if the 401K plan is required by law to allow me to use the 72t rules? Do they have to provide this option or is it at the discretion of the plan administration.
Also, Is a 401K company allowed to force me out in the first place?
Thanks,2017-02-19 12:29, By: stevea, IP: [188.8.131.52]
L2: 401k and 72tYou should look for an IRA custodian who is comfortable opening a rollover IRA account for you. It is not a good idea to set up a 72t plan with a 401k anyway due to your lack of control over the plan, particularly if the plan can force out your account. If you open the IRA, then have the IRA custodian assist you with a direct rollover from the 401k. This will avoid any withholding and also avoid a tax bill. To be clear, if the plan sent you a check with 20% withheld, you could still roll it over within 60 days, but would have to come up with other money to replace the 20% and avoid taxes on that 20%. By law, the 401k plan must offer you a direct rollover if you request one. Once the direct rollover is complete and you know that the entire balance is in the rollover IRA, you can start your plan. Be sure you review the planning pointers on this site before doing that. With an IRA 72t plan you have better control of the investments and the distributions needed to meet the 72t requirements and if an error is made you have a better chance of being able to fix it if you act soon enough.
A 401k plan is allowed to force distributions as long as they use the same requirements for everyone. This is particularly used with small accounts (I think over 5k), but this must be a much larger balance than that or a 72t plan is not worth the hassle. Again, the 401k MUST offer former employees a direct rollover if requested.2017-02-19 17:05, By: Alan S, IP: [184.108.40.206]
L3: 401k and 72tI suggest that you be very careful with terminology. Technically, a “rollover” occurs when the 401-K administrator writes the check to YOU. I recommend that you use the wording “direct electronic trustee-to-trustee TRANSFER” in your discussions with yourn current company.
Just to clarify Alan’s excellent response, if they write the check to you, they are REQUIRED TO WITHHOLD FEDERAL INCOME TAXES OF 20% as well as the 10% PENALTY for early distributions before age 55 (or the calendar year in which you will become 55). As he said, you would have to come up with the total of those taxes within 60 days in order to “roll over” the full amount. For example, if your 401-K has $ 500,000, they will withhold $150,000 and you will receive a check for $ 350,000. But if you do not deposit $ 500,000 into the ROLLOVER IRA, then you will be taxed on the shortfall of $ 150,000, which would be taxes of at least $ 52,500 (25% tax bracket + 10% penalty). If you do have an extra $150,000, then you would have to deposit that in addition to the $ 350,000 check. Then, next April, you would get credit for the $ 150,000 in taxes they withheld. If you did not have any extra money within 60 days, then the $ 150,000 would be used to pay the $52,500 taxes on the $ 150,000, and you might get back the $ 97,500, but this transaction might also have pushed you into a higher tax bracket on the rest of your income.
I suggest that you ask their HR department if you qualify for the NUA provisions of the tax laws. These can save a lot of taxes if the 401-K has stock of the employer company in the plan. Public companies often contribute company stock for their matching contribution. Also, you might have liked your company’s future so much that you had them buy company stock with your contributions. These provisions are complex, but can save you a lot of taxes, and can give you flexibility, as well as avoid the need for a SEPP 72-T plan. (You can get an excellent idea about it in J K LASSER YOUR INCOME TAX, available at most big bookstores, and many libraries.)2017-02-19 17:46, By: dlzallestaxes, IP: [220.127.116.11]
L3: 401k and 72tThank you both for these detailed replies. I am unfortunately very well aware of the gloomy tax consequences of cash out disbursement if I am not able to find another IRA company willing to setup an IRA for me.
At this point I am really looking for any options that would prevent this to happen.
This is the reason I have started looking at 72t, it might not be the best options but I am trying to make sure this option is available at all. In other words, is the 401k company required to provide this option if I request it.
I like your sentence “Again, the 401k MUST offer former employees a direct rollover if requested.” that seems to mean for sure that they have to provide a direct rollover solution for me if i request it. But, I am not sure how they will be able to do that since all regular brokers I have called will not host an IRA for me because they don’t want to deal with the regulations attached to my US citizenship and foreign residence status. Perhaps they are some specializedfiduciaries that are setup for that but I do not know who they are and how to find them. If the 401k company were not able to find one, what would happen then?, would they come back and say we have to send you a check.2017-02-19 20:08, By: stevea, IP: [18.104.22.168]
L4: 401k and 72tMany companies, surprisingly even Vanguard, require ex-employees to move their 401-K to an IRA (even with the same investment company).
SUGGESTION — Don’t tell prospective brokers or mutual fund companies that you are planning to move overseas next year. We all have clients who have IRA’s and live overseas. No one knows if it is ever “permanent” because circumstances change, and so do plans. Most of these clients use a relative’s address, or our address for convenience, and to keep the company in the dark. The clients are still taxed on their total world income as long as they have U S citizenship, but get a tax credit for taxes on income taxed by foreign countries. You might need to contact large regional or international tax practitioner firms who have experience with international tax laws. They would probably be able to direct you to an appropriate brokerage firm or mutual fund.
I think that many large brokerage firms have clients who live overseas, and have joint citizenships.
I think that you might have inadvertently given them the wrong impression that you were going to renounce your U.S. citizenship.2017-02-19 21:08, By: dlzallestaxes, IP: [22.214.171.124]
L5: 401k and 72tYes, I agree the best and easiest solution would be to use a relative’s address in the US as the address on my current 401k account or any prospective brokers. But unfortunately, I don’t think it’s possible for me so I am kind of stuck.I feel that I am trapped. It would be such a huge loss (around 40% of the total $ balance) if they send me a check and I have to pay the taxes and penalty.
I don’t understand how ERISA laws could allow that to take place. Tax deferred accounts are supposed to protect money for later years but actually in this case it’s the other way around. It would have been better for me to spend this money earlier or to save it in a non deferredaccount.
Yes, I intend to remain US citizen, work and family are just requiring me to be non-resident
2017-02-20 09:43, By: stevea, IP: [126.96.36.199]
L6: 401k and 72tI have a client who is moving to the Philippines. He is using his friend’s address in the US. He could have used my address, his attorney’s address, or even his ex-wife who he is still friendly with.
Many companies will not allow ex-employees to continue in their 401-K plans, and require that the balances be transferred to rollover IRAs. Your issue should not be with ERISA or the company. I’m sure that you will find a company that will set up an IRA for you. Just keep looking, and keep your future plans to yourself when talking to them. Just indicate that you have to transfer your 401-K from your former employer.2017-02-20 20:02, By: dlzallestaxes, IP: [188.8.131.52]
L2: 401k and 72tJust roll it over to an IRA, use a trusted relatives address for mail. Set up to only receive electronic statements. Did that for customers who were going overseas for a few years.2017-02-21 04:40, By: brkr12002, IP: [184.108.40.206]