age 55 exemption

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L1: age 55 exemptionI”m curious to see if anyone has had an experience that is applicable in the following question. Due to a divorce in 2001, I was awarded 50% of a company 401k from my husband. I never worked for his company. I have not done anything but keep it although the plan sponsor has changed one time. I am considering a SEPP and wondering if I may qualify for the 55 age exemption, I am 58 yrs of age. 2007-09-14 07:40, By: morri, IP: [71.51.202.7]
L2: age 55 exemptionThe age 55 exception does not apply to you, but this is a moot point since you are evidently an alternate payee under a QDRO. As such any distributions that you are allowed to take directly from the 401k are NOT subject to the early withdrawal penalty. It is one of the exceptions under Sec 72t.
I suggest contacting the plan administrator to see exactly what partial distribution options are available to you. If you can take enough out to get you to age 59.5, only a year or so away, you could then transfer the balance to your own IRA and since you would be 59.5, there would be no penalty applied to distributions.
In addition, you should check with the plan to see what NUA possibilities exist with any highly appreciated employer stock shares that exist in your portion of the account. You might be able to do a lump sum distribution including the employer shares. When you sell them later, all the gains would only be subject to the much lower LT cap gains rates. If you are in the 15% or lower bracket, that rate would actually be -0- in 2008-2010. This gets complex, so you will need so help with it, but you should check it out. If those shares were to be transferred to an IRA, you would forfeit any use of the NUA benefit.
Bottom line, at age 58 you should avoid the SEPP if you can, and you probably can with proper planning.2007-09-14 19:37, By: Alan S., IP: [24.116.165.60]

L2: age 55 exemptionCLARIFICATION !!!
Alan S” comments are right on. Except he forgot to mention that if there is employer stock in the plan, then if you take the LUMP SUM DISTRIBUTION (which is usually highly recommended, and saves lots of taxes), then you are taxed in that tax year on the employer”s cost when he bought the company shares in the plan. Obviously, you only use this approach if the company”s stock value has increased significantly over the years.2007-09-14 21:50, By: dlzallestaxes, IP: [151.197.62.224]

L2: age 55 exemptionWHOA. We need to be very careful here.
IRC 72(t)(2)(C) exempts distributions from the 10% surtax resulting from domestic relations orders as defined by IRC 414(p). Let”s llok closely at what this means.
1. If the judge says to Bob (Morri”s now ex-huband), transfer 50% of your 401(k) plan balance to Morri then that event happens and it is a non-taxable event provided Morri either leaves those assets in Bob”s 401(k) plan under her name, or transfers those assets to some other qualified plan or IRA.
2.If the judge says to Bob, pay Morri $1000 per month from your 401(k) plan for 10 years plus make special $10k extra distributions from your 401(k) plan at the end of years 3, 5 and 7; then these traxable payments are also not surtaxedbut are taxable as ordinary income to Bob, not Morri.
3. Now, take the last situation where Morrinow has a 401(k) asset and wishes to commence distributions. How she received it is irrelevant. If she starts taking distibutions before age 59 1/2; then the 10% surtax will apply unless she does so under a SEPP plan or other valid exception!!!
TheBadger
wjstecker@wispertel.net
2007-09-15 06:38, By: TheBadger, IP: [72.42.66.90]

L2: age 55 exemptionBill,
I agree with 1 and 2, however not with #3.
I believe that any distributions, even discretionery distributions that Morri is allowed to take from the plan from either her separated account or pooled portion of the ex”s 401k would be deemed a direct QDRO distribution and exempt from early withdrawal. Here is just one article supporting that position:
http://www.qdrodirect.com/NewsDetail.aspx?id=44
Am I missing something?2007-09-15 18:08, By: Alan S., IP: [24.116.165.60]

L2: age 55 exemptionHello Alan:
I think this will be one of those situations where we might eventaully “agree to disagree”. In my mind there is no question that the transfer of assets (whether they remain in a QRP or not is irrelevant) is a tax free transfer pusuant to IRC 414(p); therefore IRC 72(t) does not and can apply because no taxable event has taken place — YET.
Now, the alternate payee (usually the spouse) has come into possession of an asset that is now titled in their name; not the original account holder”s name. In all respects, that”deferred” asset (again whether it remains in a QRP or is rolled over into an IRA is not relevant) is their asset and the manner of acquistionis not pertinent. This is distinguished from a situation where the original account holder is subject to a QDRO to directly pay out (in the manner of a taxable event) to some number of other payees; e.g. spouse and children.
The new owner of the deferred asset now must stand on their own two feet so to speak and is subject to IRC 72(t) to the extent that the new owner decides to take distributions for whatever reason and gets to use whatever exceptions to the 10% surtax that might be available. In the (un)usual reverse (perverse?) manner, one needs to look at supporting / secondary authorities to get a better picture. In this case see PLR 1991-26060 which is pretty much on point — Spouse acquires the deferred asset which is tax free (ruling request #1) and then commences SEPPs which is exempt from the 10% surtax (ruling request #2).
Let”s take the reverse situation. Let”s assume for a moment that the ex-spouse (alternate payee) in this situation could acquire the asset tax-free under IRC 414(p) and then could commence distributions from that deferred asset under IRC 72(t)(2)(C) in any manner (s)he saw fit before the age of 59 1/2; essntially ignoring IRC 72(t)(1) and not complying with IRC 72(t)(2)(A)(iv) SEPPS. This would create a fairly large morale hazard. Given that judges will sign just about anything as long as the lawyers and the ex-spouses agree; therefore, some number of spouses would simply divorce (admittedly for tax motivated reasons) simply to get the QDRO written & signed to cause the transfer of the deferred asset to the other spouse so that distrbutions could be random and at the same time surtax free.
TheBadger
wjstecker@wispertel.net

2007-09-16 06:53, By: TheBadger, IP: [72.42.67.40]

L2: age 55 exemptionCAUTION — QDRO RULES DO NOT APPLY TO IRAs. They only apply to employer-sponsored plans. Once you rollover these amounts to an IRA, you can no longer use the QDRO exemption from the 10% penalty for distributions from the IRA regardless where the funds came from. That”s why divorcees under 59 1/2 are usually best advised to keep a “split” plan with the ex”s employer until then, so long as the employer”s plan allows for this process. Unfortunately, some plans are not as “divorce friendly” as others, in which case the only alternative might be the rollover to an IRA, and the 10% penalty on any distributions < 59 1/2, unless the divorcee then sets up a SEPP 72-T (which I would try to avoid for someone 58 years old, if at all possible).2007-09-16 10:21, By: dlzallestaxes, IP: [151.197.217.148]