72(t) On A 401k

L1: 72(t) On A 401kI started a 72(t) SEPP distribution on my 401k account in 2003, just
before my 53rd birthday, using the 120% Fed Midterm Rate for the
previous month, the end of 2002 year account total, and the
Annuitization Method. Unfortunately, the Fidelity cartetaker for
the company 401k account coded the year 2003 Form 1099R as “1” instead
of “2”, and the IRS has recently come back asking for the 10%
penalty. When I started the SEPP withdrawal, I specifically
inquired on some internet boards (sorry, cannot remember whether this
one or not) whether the 72(t) SEPP withdrawal was applicable to a 401k
in addition to an IRA, and was told it was indeed so (saved text of
original inquiries below). As with my original request in early
2004, Fidelity today again refused to change the year 2003 Form 1099R
to Code “2”. The representative further informed me that 72(t)
SEPP withdrawals cannot be made from a 401k account prior to the
company””s retirement age of 55 (I was layed off at age 50 and did not
return to the work force, and started benefits from the company paid
retirement plan at age 55, but wonder why this would have anything to
do with a 401k, a completely different animal). So I have the
following questions.

1. Can 72(t) SEPP withdrawals be made from a 401k account without penalty?
2. If the answer to #1 above is “yes”, is there an age limit as to when
these withdrawals may be started, and, if so, what is it and the
reasoning?
3. What is the best way to reconcile this problem with the IRS?

Thank you for any and all help!

Richard

P.S. – Prior to the start of the SEPP withdrawal, I made one
non-recurring withdrawal of $3000 for excess 2003 medical expenses that
was also coded a “1” by Fidelity on the 1099R. What do I need to
do to justify this to the IRS as a penalty excluded distribution?

P.P.S. – Text of original inquiry (note – I finally did roll the 401k over into a Fidelity IRA in early 2004):

Hi! I have a question
regarding starting a SEPP without penalty this month (June) on my 401k
account. A representative of my
company’s 401k administrator (Fidelity) questioned whether I was sure I could
use a SEPP for a 401k, since, she said, the 72t rules were written for IRAs,
not 401k plans. I realize I could roll
over my 401k into an IRA, but doing so would lose me access to a money market
fund currently paying over 4% per year (where 70% of my 401k funds currently
reside), plus some mutual funds such as Oakmark Select that are closed to the
general public. I could not maintain
these investments in an IRA rollover, even to Fidelity. So, my major question is, do the 72t
provisions for SEPPs without penalty prior to age 59 _ apply to 401k plans as
well as IRAs, or do I need to first roll over my 401k plan into an IRA?

2006-03-16 14:45, By: Nchick, IP: [66.215.123.27]

L2: 72(t) On A 401k
Can 72(t) SEPP withdrawals be made from a 401k account without penalty?Yes. If you need documentation merely look to Section 1.01 of Rev. Rul. 2002-62. However, the Trustee/Custodian is not obligated to give you a code of 2′.
If the answer to #1 above is “yes”, is there an age limit as to when these withdrawals may be started, and, if so, what is it and the reasoning?No age limit applies if a SEPP is implemented. There is a separate rule to remove the 10% penalty if separation of service occurs on or after age 55.
What is the best way to reconcile this problem with the IRS?Be ready to provide the IRS with documentation as to the plan, the assumptions and the distributions taken to date. Unless you sent a dated copy of the plan provisions to your Trustee/Custodian, you may be hard pressed to convince the IRS that the $3k withdrawal was outside the plan if they accept that there was a plan.

It sounds like the error may have been made by you – you should have filed form 5329 to claim the exemption in each of the years that you received a code of 1′.

At this point, you may want to get some professional advice whether or not you have good documentation to back up you plan and the $3k medical withdrawal. 2006-03-16 20:39, By: Gfw, IP: [172.16.1.73]

L2: 72(t) On A 401kThank you for your response. May I also inquire, when did IRS
Form 5329 make its appearance, and how should I have reasonably been
made aware of it? I don’t believe this form was in existence in
June, 2003, or at least well known, else I believe I would have been
aware of it, since I was extremely concerned, aware, and inquisitive as
to setting up my 72(t) SEPP plan at the time. Also, when I
download this form off the IRS website, it is marked “2005” in th URH
corner. Can this form be used for the 2003 tax year, and, if not,
how do I obtain the proper 2003 form? Thank you again for your
help!

2006-03-16 22:44, By: Nchick, IP: [66.215.123.27]

L2: 72(t) On A 401kForm 5329 has been available for many years. You should be able to pull up the correct edition off the IRS website for each year you need to for your situation.2006-03-16 23:12, By: Alan S., IP: [24.116.165.157]

L2: 72(t) On A 401kNchick:
I think I’m hearing a subliminal message from you: “Help! What do I do now?”
My suggestion is to get help from someone very knowledgeable with 72(t) and how to deal with the IRS. Find a posting on this board from TheBadger, aka Bill Stecker, and use the e-mail link to him to arrange getting your problems solved. He ain’t cheap but he’s good, and that’s what you need now. OK, he’s “reasonable.”
Good luck.
Jim2006-03-17 08:07, By: Jim, IP: [70.184.1.35]

L2: 72(t) On A 401kThanks, all, for your responses. It appears that my tax preparer
dropped the ball, apparently didn’t have knowledge of IRS
Form 5329 to correct the Code “1” 1099R in the correct time frame,
though she was aware of the problem when the return was filed.
Hopefully I will be able to do so now. Wish me luck!
2006-03-17 11:46, By: Nchick, IP: [66.215.123.27]