401K Rollover to IRA for SEPP aggregation
L1: 401K Rollover to IRA for SEPP aggregation
Researching a new SEPP (401K rule of 55), Birthdate 2/5/1961,First distribution unknown.
Still employed with 401K, also have a Traditional IRA.
I am anticipating leaving this year at some point. I am qualified for Rule of 55 withdrawl from 401K using 72ts.
I am looking for a approximate 5 year bridge to access Social Security, wife’s IRA, wife’s social security and pension to be withdrawn in about 5 years. After 5 years of SEPPs plan on backing off on the SEPP amount and primarily using other sources for income.
I have read the William J Stecker big 153 page file on 72ts,SEPPs, etc. Fantastic read honestly. I believe the latest version is from 2004 on the internet. That information states that rolling a 401K to an IRA disallows the funds that were from the 401K to be used for an IRA SEPP. It warns to avoid all these pitches that you should roll your company 401k over to an IRA just because there maybe more investment vehicles to choose from vs the company 401K plan. The Strecker document says you should if deemed proper for your situation, do the reverse and roll the IRA into the 401K prior to separating from the company providing the 401K. This will allow for a larger amount or an aggregation of assets for a larger payout on 72t calculations. It is also within the critical rules. This Makes sense.
My question is why do I keep seeing on many blogs and sites that say to go ahead and roll over the 401K to the IRA and then start your SEPP in this IRA? This would completely destroy the entire idea of aggregating for the purposes of simplification and higher payout.
Why is this being said, if it is not true? Has there been some IRS update since the Strecker 2004 document? Thanks for the help, enjoy this site and all your readers contributions.
2018-07-03 17:45, By: sonboy, IP: [2605:6001:ed44:e000:562:a065:2512:5130]
L2: 401K Rollover to IRA for SEPP aggregation
Be careful. Many of those blogs/sites are written by brokers, financial planners, and Mutual Fund companies who do not even know about the “55 rule” (which actually allows it at any time in the calendar year you will become 55).
Of course, your employer must allow you to take leave your 401-K balance with him, and also allow periodic distributions whenever you may infrequently or frequently request. If so, I see no reason to rollover your 401-K to an IRA, unless you want a wider diversification of your investments, or a better return, than available in your 401-K.
Leaving your 401-K account alone gives you significant flexibility and control over the distributions.
There are various aspects to “PLANNING DURING RETIREMENT” which I have posted previously to coordinate actually taking IRA distributions and doing ROTH CONVERSIONS between 59 1/2 and 70, and to defer your SS benefits until 70 (which is 75% higher than 62), while starting your wife’s SS benefits at 66 (which is 30% higher than at 62). The goal is to try to keep yourself in the new 12% tax bracket, which jointly is about $ 100,000 of gross income (before the $ 24,000 or $ 26,600 Standard Deduction). By taking IRA distributions, and doing ROTH Conversions, between 59 1/2 and 70, this will reduce the taxable income at 70 1/2 when RMD’s start. In addition, 15% of SS benefits are never taxed, so it is an additional advantage to defer them to higher amounts.
2018-07-03 19:24, By: dlzallestaxes, IP: [22.214.171.124]
L3: 401K Rollover to IRA for SEPP aggregation
A planning pointer frequently missed. If spouse has her own benefit, when she reaches SS eligibility she can still take 50% of your benefit, letting her benefit grow until age 70 and then taking her own benefit. We did that and now her benefit is larger than mine.
2018-07-03 22:20, By: Gfw, IP: [126.96.36.199]
L4: 401K Rollover to IRA for SEPP aggregation
It depends upon the respective SS benefit levels and relative ages. You have to do the calculations. Sometimes it works, and sometimes it doesn’t. Also, the health and familial life expectancies have to be considered.
2018-07-03 22:34, By: dlzallestaxes, IP: [188.8.131.52]
L3: 401K Rollover to IRA for SEPP aggregation
Thank you dlzallestaxes. Definitely will look at the TIRA to Roth down the road (59.5 yrs old), looks like a great idea prevent the bracket creep with RMDs, survivorship, etc. down the road.
This all leads to another set of questions.
My company offers a cash balance buyout of my pension (in lieu of a monthly annuity pension) that I could roll into the employer sponsored Fidelity 401k. This is per the company 401K administrator Fidelity. I couldn’t really find anything addressing issues that would come up with this type of activity. After completing careful analysis on whether this would work, I would consider it.
Let’s say just for discussion I decided to roll the cash balance pension buyout into the 401K after separating from the company. Fortunately, it would not affect or stop any retiree benefits, medical and otherwise.
After making sure all distributions from the cash balance pension buyout have been received in the 401K, I would start to administrate the 401K SEPP. The additional funds would certainly boost the SEPP annual distribution.
I understand that one needs to look at the entire financial picture, including pension annuity vs cash balance buyout. That is an entire discussion right there.
This being said, are you aware of any issues related to SEPP calculation this would have? I would think it might be an option if it would be allowed under IRS 72t rules. However, I haven’t seen anything directly stated on this issue, or am just not understanding the terminology.
Thanks Gfw and sm69 as well.
2018-07-03 23:54, By: sonboy, IP: [2605:6001:ed44:e000:8129:d323:4831:d772]
L2: 401K Rollover to IRA for SEPP aggregation
Your question: “My question is why do I keep seeing on many blogs and sites that say to go ahead and roll over the 401K to the IRA and then start your SEPP in this IRA?”
1) The blogs or sites somehow function as advertising for IRA custodians and the blogs or sites are making a commission. Any potential IRA custodian has to recover costs of providing IRA services, plus a profit (except non-profits like Vanguard).
2) The blogs or sites are unaware of the “rule of 55” that applies only to 401k’s and not IRA’s. Most individuals considering early retirement are probably not aware of it.
3) If they are aware of the “rule of 55” then they are not having an intelligent tradeoff discussion between keeping the 401k and taking penalty-free distributions versus rolling into an IRA and doing SEPP distributions from the rollover IRA. In most but not all cases, the 401k distributions are better (after separation from service in the year of age 55).
2018-07-03 20:24, By: sm69, IP: [184.108.40.206]
L3: 401K Rollover to IRA for SEPP aggregation
The key to use of the age 55 separation exception is determining what distribution options your plan offers. To utilize this exception the plan should offer flexible distributions each year, at least two per year and preferably more. If the plan does not offer that and particularly if they require a lump sum distribution, the exception is not helpful because what you save by eliminating the penalty will be lost in higher tax rates due to having to take out enough to get you to 59.5 in a single year. Lacking flexible distribution options, you would then do a direct rollover to an IRA and start a SEPP from the IRA.
Another variable is the length of time to get to 59.5. You are 2.5 years away now and prior to 59.5 you have to bridge 3 different calendar years (2018-2020), so if the age 55 exception is not workable due to limited distribution options, you will still probably need the SEPP. But if you were to get close enough to 59.5, and the plan required a lump sum distribution, you still might take it even if your tax rate was increased somewhat to avoid the 5 year commitment to the SEPP and the attendant risks involved.
So I would start by finding out exactly what the distribution options are after you retire, other than a lump sum distribution.
2018-07-04 00:42, By: Akan S, IP: [220.127.116.11]
L4: 401K Rollover to IRA for SEPP aggregation
The 401(k) distribution options should be in the 401(k) plan document which may actually be a better source than human resources. You may actually find out more information by reading it.
2018-07-04 00:47, By: sm69, IP: [18.104.22.168]
L5: 401K Rollover to IRA for SEPP aggregation
Understand the point, however I have read the SPD (Summary Plan Descripton), not addressed unfortunately. My experience looking into this (without a CFP or Tax Pro) at this point finds very limited info from the company or 401K plan administrator. That is why I am here at this point. I have also read of others experiences with Fidelity and many have the same frustrations. Gotta to find the right person, even then, it is your responsibility. May hire a pro, still resarching here, could help others as well.
2018-07-04 01:12, By: sonboy, IP: [2600:387:1:813::5a]
L6: 401K Rollover to IRA for SEPP aggregation
I do not understand why you are looking into any SEPP which would lock you into a 5-year plan. If you waited to retire until late in 2018, you would have only 20 months until August 2020 when you will be 59 1/2.
You did not indicate your wife’s age or birth date, so we do not know when she will become 59 1/2, and able to take distributions from her IRA without the 10% early distribution penalty.
If you have non-retirement assets, retirement severance, or a house that you can use for a Home Equity Loan or Line of Credit, I would strongly consider using one or a combination to provide finds to get to 59 1/2.
Does you company 401-k and or pension have company stock in it ? Companies usually make their contributions to 401-Ks (for their matching contribution) and pensions in company stock. If so, research the special IRS provision for NUA (Net Unrealized Appreciation on Company stock). This can save you thousands or tens of thousands in taxes. (I saved a client $ 100,000 on a $ 750,000 401-K t a public company when he retired.) In addition this will make funds immediately available to you.
2018-07-04 04:54, By: dlzallestaxes, IP: [22.214.171.124]
L7: 401K Rollover to IRA for SEPP aggregation
Understand the advice, have reasons for considering implementing. Would rather not go into all the details here please understand. This may not even happen. However, would still like to know if the pension lump sum transferred into the 401K after separation from employment is going to be an issue at all with IRS 72t rules. Thanks.
2018-07-04 05:06, By: sonboy, IP: [2600:387:1:813::5a]
L8: 401K Rollover to IRA for SEPP aggregation
SEPP 72-T calculations are based upon the value of the account after any transfers into or out of the account. If you transfer the pension lumpsum into the 401-K, it would be included in the SEPP calculation because that total is used for the SEPP calculation.
Similarly, if you subsequently transferred the total to an IRA, then that total would be included in that IRA’s SEPP calculation.
You could also consider transferring your lump sum pension to your IRA while keeping your 401-K at your company if you want more diversification for your retirement investments, especially if transferring the pension to your 401-K has any issues. You could set up a SEPP with your IRA for the 5-year period to get you to 62 if you were not interested in starting withdrawals at 59 1/2.
But you did not answer about the NUA aspect, which could be the best solution, especially if you are working for a public company, and the value of their shares have appreciated.
2018-07-04 16:30, By: dlzallestaxes, IP: [126.96.36.199]
L9: 401K Rollover to IRA for SEPP aggregation
Thanks again, dlzallestaxes..That is the type of information I was wondering about. Thank You. As far as the NUA, I wish I could use it, fortunately, I don’t have a lot of company shares (called “Company Shares Fund”). They are not actually pieces of stock (AFAIK), it is an option that seems to generally track the value of company stock. It is part of the company match. They did post dividends just like the company stock, so maybe they are NUA qualified? I don’t know. You can exchange in and out of them and move those funds around to different investment vehicles. Unfortunately, even if they did qualify for NUA, they would have been close to break even or a small loss believe it or not. I exchanged out of them annually to other choices in the 401K.
You said, “You could also consider transferring your lump sum pension to your IRA while keeping your 401-K at your company if you want more diversification for your retirement investments, especially if transferring the pension to your 401-K has any issues. You could set up a SEPP with your IRA for the 5-year period to get you to 62…”
So, as I shake my head…LOL, the IRS will allow the lump sum pension to be rolled to the IRA and qualify that new amount to calculate SEPP, but would not allow the 401K rolled to the IRA and allow that 401K portion to be used to calculate SEPP.
Am I right?
2018-07-04 16:52, By: sonboy, IP: [2605:6001:ed44:e000:bd72:c1bc:77a5:c1ab]
L10: 401K Rollover to IRA for SEPP aggregation
Not quite. The IRS will allow you to transfer the lump sum to either your 401-K or your IRA. Your 401-K may not allow it.
My point was that you might consider a “compromise” approach by transferring your lump sum to your IRA to get more diversification of your investments in your IRA than might be available in your 401-K, if you did not care about being locked into a SEPP for 5 years, vs. using a different approach to get to age 59 1/2 and having unlimited flexibility in cash flow, and more importantly in tax planning. The SEPP approach gives you mandatory taxable income, which you should also take into consideration.
There a many alternative approaches to consider, and a professional would be able to project the various scenarios as to cash flow, taxes, appreciation, etc. The cost of doing this professionally should definitely be worthwhile, and save you much more in taxes than the cost of the service.
2018-07-04 18:23, By: dlzallestaxes, IP: [188.8.131.52]
L11: 401K Rollover to IRA for SEPP aggregation
Great advice, thank you again. Interestingly, yesterday CNBC issued a story about on accessing 401K funds prior to 59.5 yrs of age. No mention of Rule of 55 at all. When used properly, legally and strategically it is a valuable tool.
2018-07-05 11:52, By: sonboy, IP: [2605:6001:ed44:e000:6c3c:7f44:ce3:3f43]
L12: 401K Rollover to IRA for SEPP aggregation
It is not a good idea to use your 401k for a SEPP when a direct rollover to an IRA would allow you to establish a SEPP from your IRA. The IRA is a better choice because you have more control over the account and particularly distributions have much more flexibility. You can also do a rollover back to the IRA if you make an error and take out too much. Finally, you do not have to worry about delayed corrective distributions from the 401k which could bust your plan or attract IRS attention.
Note that Fidelity is simply the administrator of your 401k plan. They do not make the plan rules, but are hired to administer the rules adopted by the employer plan committee. But if they cannot confirm what your distribution options are after retirement, they should either contact the employer or you may have to contact the employer and get the answer is writing. Finding out later on that you are only allowed a lump sum distribution will impair the age 55 separation exception unless you are very close to 59.5 when withdrawal would not be large enough to increase your marginal rate.
If there is no alternative to the SEPP, you need to manage the account balance to match it up to the distribution amount you need. This is done by first doing a direct rollover from the 401k or pension to a rollover IRA, then determining the account balance needed for your IRA SEPP and do a direct trustee transfer of that amount to a new IRA account which would be used for your SEPP.
Remember, that you must take a minimum of 60 months of SEPP distributions since your plan cannot run less than 5 years. However, if you happen to bust the SEPP your retroactive penalty due only applies to distributions you took before age 59.5.
2018-07-05 15:33, By: Alan S, IP: [184.108.40.206]
L13: 401K Rollover to IRA for SEPP aggregation
SONBOY — I suggest that you do yourself. and all of us, a favor a stop dancing around with generalities, and ” just give us the facts” (as Joe Friday used to say).
1. How much is in your 401-K ?
2. How much is in your IRA ?
3. How old is your wife (i.e. her DOB) ?
4. How much is in her IRA ?
5. How much will her SS Benefit be at 62, 66, and 70 ?
6. How much cash flow, net of taxes, are you looking to generate ?
7. How much non-retirement investments do you have ?
8. How much equity do you have in your home (for a HELOC or Line of Credit) to get you to 8/2019 ?
2018-07-05 18:18, By: dlzallestaxes, IP: [220.127.116.11]
L14: 401K Rollover to IRA for SEPP aggregation
dlzallestaxes … All those specifics on an internet board? I appreciate the holistic financial advice, but, in reviewing many other posts on this board, that tone and request for detail isn’t quite universal. Not sure what happened in a couple days. I can either make up a bunch of phoney amounts and dates like 90% of what you see, or I can just ask you to believe everything I said was true. I am not comfortable putting that out to the public. Ok?
You provided great information, I appreciate it. Just looking back…
William Stecker states “If the taxpayer terminates employment with the employer / plan sponsor and immediately rolls the plan assets into a rollover IRA; the IRA assets, though they did originate from the qualified plan, are now ineligible for treatment under 72(t)(2)(A)(v). The assets must absolutely remain in the plan. Thus, as a caution, taxpayers should resist the sales pitches from various financial advocates that exemployees should quickly rollover their plan assets into IRAs in order to take advantage of all the investment vehicles that are available through an IRA and might not be available inside the qualified plan.”
Two days ago you said, “Of course, your employer must allow you to take leave your 401-K balance with him, and also allow periodic distributions whenever you may infrequently or frequently request. If so, I see no reason to rollover your 401-K to an IRA, unless you want a wider diversification of your investments, or a better return, than available in your 401-K.”
“Leaving your 401-K account alone gives you significant flexibility and control over the distributions.”
Okay, great. Answers the question. Then a discussion on back door Roths after 59.5, Social Security. Okay great thank you.
I then brought up the lump sump from a pension being rolled in to the 401K, can you roll it into the 401K.
“SEPP 72-T calculations are based upon the value of the account after any transfers into or out of the account. If you transfer the pension lump sum into the 401-K, it would be included in the SEPP calculation because that total is used for the SEPP calculation.”
You then advised (with this new information about the lump sum), that possibly it would be more advisable to roll the lump sum to the IRA for better tax planning flexibility. That confused me, so I pointed out the illogical (although not necessarily incorrect) that the IRS allows a lump sum to be rolled into an IRA and then the entire amount is aggregated for SEPP calculation. However, this doesn’t apply if the 401K is rolled to and IRA. Stecker stated this, you stated this.
Okay, then we discussed NUA, that wouldn’t be affecting me. Okay, great.
I brought up the interesting tidbit that CNBC discussed access 401K prior to 59.5 with no mention of Rule of 55. Okay great.
I’m good. My plan administrator advises everything I was thinking of doing is absolutely available. Just found that out today. Whether a CFP would advise of that is an entirely different story.
2018-07-06 02:50, By: sonboy, IP: [2605:6001:ed44:e000:656f:55f4:f686:30fb]
L15: 401K Rollover to IRA for SEPP aggregation
No problem. 90% of all postings include either exact figures or rounded figures for the account balances. That way others can make calculations for those who cannot figure out how to use the calculators, or to verify the calculations by the poster.
The ages, account balances, and cash needs provide us with the info we need in case there are alternative approaches that make sense to consider, including how much to place in the SEPP IRA, and how much to set aside in a separate IRA for future contingencies.
If your plan allows you the ability to stay in the 401-K plan, and to take periodic distributions until you are 59 1/2, then that is the best option. We suggested that you get that info initially. Do you really need all of the 401-K and the lump sum in order to provide the cash flow you need ? If not, then you still have to do an evaluation of the lump sum option vs. a lifetime pension for yourself, and possibly some lesser amount for both you and your wife. That is an entirely different aspect than the SEPP IRA.
2018-07-06 05:31, By: dlzallestaxes, IP: [18.104.22.168]
L16: 401K Rollover to IRA for SEPP aggregation
Okay, thank you. Not sure if I will take the lump sum, although leaning that way. One good thing about the 401K is that it allows up to 50% of assets to be invested in Fido Brokerage Link. This gives more flexibility. It’s a Fido brokerage account within the 401K. Fido products trade for very little if any fees along with some iShares products. Vanguard choices can be selected, but, Fidelity (of course) charges a premium brokerage fee. If your passive investing may not matter. Most Fidelity ETFs, Mutuals have no purchase/redemption fees in the plan.Sorry Bogleheads. In the event of death during SEPP, the SEPP is stopped. The 401K is passed onto spouse as beneficiary. The options allow her to roll, keep or cash it out. If I took the annuity pension, it would have to be severely discounted to include a decent death benefit for her. The flexibility of my 401K, short term nature of the SEPP, and survivor options, taxes, all come into play. Also looking into HSA tax bennys if I ever find my self in a high deductible medical plan due to company changing retiree medical program. Just a hypothetical, who knows what they will do.
2018-07-06 20:26, By: sonboy, IP: [2605:6001:ed44:e000:ad7b:a09e:b4b6:53b0]