72(t) from 401(k) questions
L1: 72(t) from 401(k) questionsI’m considering leaving my current employer, and am considering using SEPP’s to take annual penalty-free distributions from my traditional 401(k) after separation. A few questions:
1. What would happen if I ever decided to return to this employer at a later date? Do employers typically establish new 401(k)’s or “re-open” the old one? Could an employer require “re-opening” a 401(k) that has already begun SEPP’s as a condition of participating in their 401(k)?
2. Would it be better to roll-over an old 401(k) into an IRA prior to SEPP’s? That may alleviate concerns with #1, but are there any disadvantages to doing so?
3. Most calculators seem to have a minimum age of 35. There is actually no minimum age to taking SEPP’s, though, correct?2013-03-21 03:14, By: astrosgp, IP: [18.104.22.168]
L2: 72(t) from 401(k) questionsIf you are already 55, or will become 55 before 12/31/2013, STOP !!! You do not have to set up a SEPP, and should not roll over your 401-k to an IRA.
Please give us your date of birth, and the amount in your account.
Also, ask your employer’s HR dept or plan administrator if there is NUA Employer Stock in your 401-K. If so, get the COST BASIS, and do nothing until you get this info. (Search this website for the NUA discussions, or research it yourself or with a tax professional who is familar with it. It can save you a fortune in income taxes.2013-03-21 04:46, By: dlzallestaxes, IP: [22.214.171.124]
L2: 72(t) from 401(k) questionsAstro,
I am guessing that you may have asked question #3 because you are under 35. If that is the case, your SEPP would have to continue for 20+ years, and whenever you stop the correct annual distribution (other than because the IRA ran out of money) you will then owe a 10% penalty on ALL of the payments you took, along with interest that they tack on at the IRS.It may also exhaust your 401k that you made into an IRA long before your retirement. If you go back to work, the continued SEPP payments will have to be added toyour work income for tax return purposes, and then will have higher tax bracket consequences, as well.
A SEPP is not a clever way for a younger person to fund a period of absence from a job, but is designed for older workers who need an income prior to reaching real retirement age, and the number of years of commitment have to be looked at carefully if you plan to avoid the penalty. A personal loan (before you quit) if taken out at 10% interest, would have no tax consequences, and might be a better alternative if the anticipated non-working period is not too long.
To answer your questions, after having said that:
1. Many employers will allow you to roll a 401k from a previous job back into their 401k once you qualify. If you convert it to an IRA, they do not allow it to be rolled in, since they cannot know for sure if it is really money from a retirement plan (as I understand it).
2. If under 55, you cannot take 10% penalty free withdrawals from a 401k, unless the calendar year you leave the job is the year you will turn 55, so you would have to move it to IRA to do the SEPP plan.
3. I am not sure if there is an age minimum, but refer to my first paragraph for other info that is age related. I also don’t think that there are many people under 35 who have amassed enough in a 401k to consider leaving their job and starting a (20-25year) SEPP plan after rolling the $$ into an IRA.2013-03-21 13:44, By: Ken, IP: [126.96.36.199]
L3: 72(t) from 401(k) questionsIf you have a 401-K loan when you terminate employment, you usually have to repay it at that time, and do not have the usual 5 years to repay it.2013-03-21 14:17, By: dlzallestaxes, IP: [188.8.131.52]