72t from 401K?

L1: 72t from 401K?Can a 72t distribution plan be setup in a 401K, or does it need to be from an IRA? Thank you.
2007-02-21 07:07, By: kristine, IP: [69.242.136.14]

L2: 72t from 401K?SEPP plans can be adopted for 401(k) plans as well as IRAs along with all other plans qualified under 4974.

TheBadger
wjstecker@wispertel.net
2007-02-21 07:28, By: TheBadger, IP: [72.42.67.55]

L2: 72t from 401K?Good morning Christine.
From the IRS perspective you may use a 401(k) as all or part of your “SEPP universe” to execute distributions.
However, from a practical stand point, it”s not the easiest way to run the railroad. The biggest question is, “Will the company plan allow the distributions required for a good 72(t)?” Check with your HR department to determine if the plan even allows systematic distributions on a monthly or other frequency basis. Too many will only allow a one-time distribution directly to you in conjunction with transferring the balance to an IRA Rollover account. Keep in mind that most company plans are in the accumulation business and not the distribution mode which is part and parcel of what IRA accounts do quite well.
One big point to remember is income tax withholding. The K-plan is required to withhold 20% from all distributions made didrectly to you whereas an IRA may withhold anything from 0% to something close to 100%. The choice is yours and your own tax situation will dictate what you do.
Jim2007-02-21 07:31, By: Jim, IP: [24.252.195.14]

L2: 72t from 401K?Thank you both for the information. Jim, that was very helpful info on things to look out for when using a 401K for a SEPP. I appreciate it very much.2007-02-21 07:36, By: kristine, IP: [69.242.136.14]

L2: 72t from 401K?Isn”t separation from service required if the 72(t) SEPP distribution is taken from a 401(k)?2007-02-21 09:28, By: jevd, IP: [12.147.86.150]

L2: 72t from 401K?Yes. While it is unlikely a plan would even offer a 72t, and also unlikely that a plan would offer in service distributions at any age before 59.5,from a practical standpoint thisoption would only surface after separation from service, if at all.
With respect to the withholding, there would be no required 20% withholding because a72t payment is not an eligible rollover distribution. As for making an optional election, I think it best to pay any taxes in the form of quarterly estimates rather than electing withholding from the72t payments. The fewer variables in the 72t plan, the better, even one as basic as withholding.
2007-02-21 15:19, By: Alan S., IP: [24.116.66.98]

L2: 72t from 401K?Today marks a very rare occasion that I will disagree with Alan S as he disagrees with me. When I said,
The K-plan is required to withhold 20% from all distributions made directly to you whereas an IRA may withhold anything from 0% to something close to 100%.

I wastakingthe position that the K-plan will only allow “systematic distributions” directly to the participant. Furthermore,we have had many posts stating that someone”s plan did not support or even know what 72(t) was. Case in point is the Federal Thrift Savings Plan (TSP) which I work with a lot and why I do not support trying to do a SEPP Plan from TSP. Referring to Form TSP-70, Section IV, Line 23, we find the following distribution options:

a. Life Annuity, percentage.

b. Single payment, percentage.

c. Monthly Payments, percentage,specified dollars or “Compute my payments.”

The only way to use TSP for a SEPP Plan is to calculate your monthly distribution amounts and specify the dollars to distribute using line item 23 c.

On the “General Information and Instructions” page forSection IV of thisform is the following statement:

“Single or eligible monthly payments that are not transferred directly to an IRA or plan are subject to Mandatory 20% Federal income tax withholding.”

So my conclusion is that if the TSP is required to comply with mandatory 20% withholding for their participants, then other qualified plans must do likewise because the tax withholding laws will apply to everyone in this situation. Of course it”s possible … probable(?) … that Members of Congress may have exempted themselves while sticking it to the rest of us.

Alan, thanks for your comments and sharing your vast knowledge with the participants of this forum.

Jim2007-02-22 07:32, By: Jim, IP: [24.252.195.14]

L2: 72t from 401K?Jim,
Not having any direct dealings with the TSP, your post raised the question of whether the TSP even allows SEPPs. Like any other plan, there is no requirement for plans to offer everything available under the tax code. I was surprised to see that their web pages suggest they in fact do offer a 72t qualifying distribution plan (at least on paper).
I found a 4 pagenotice (no form #)on the TSP site, “Important Tax Info about Payments From your TSP Account”. On page 4, there is reference to life expectancy payments and Pub 575, therefore it appears that a SEPP qualifying program IS available. Another chart on their site refers to distributions that are NOT eligible rollover distributions, does reference withholding, but alsopermits the employee to file a WP-4 to waive the withholding.
The main difference appears to be the requirement to file the WP4 even though the plan does recognize that these are not eligible rollover distributions.
The main point is that we both agree that 401k type plans are generally not the place to go for for SEPP plans. But perhaps the TSP is so large, they actually have the ability to assist the taxpayer in executing such a plan. It would not be the 10 year installment plan that they also offer. 2007-02-22 20:20, By: Alan S., IP: [24.116.66.98]