Are you limited to required minimum distribution method w/ SEPPs from 401K?
L1: Are you limited to required minimum distribution method w/ SEPPs from 401K?While I’m aware of other posts that indicate it could be better to do SEPP withdrawals from an IRA, I’m focused on exploring any limitations associated with a 72t plan set up with a 401K.
My discussions with Fidelity about setting up 72t withdrawals from my 401K yield their position that ONLY the required minimum distribution method can be used to calculate the SEPP distribution. In my case of being 54, they want a calculation that uses a distribution factor of 30.5. They respond that by using the amortization method, I will exhaust my401K planin less than 30 years.
Question 1: Can someone clarify whether 72t withdrawals from a 401K plan MUST follow the minimum distribution method?
Question 2: If the answer is that 72t withdrawals from a 401K plan can be calculated from all three methods,can you offer any tips on how tocommunicate with Fidelity on this point? I already faxed themIRS 401(k) Resource Guide – Plan Participants – General Distribution RulesandIRS Retirement Plans FAQs Regarding Substantially Equal Periodic Payments.
But they are holding fast to the position that for me to set up what they call a “swip” for “systematic withdrawal payment,” I need to follow theminimum distribution method and any other calculation is wrong.
Question 3: If Fidelity says my calculation method (and amount) is wrong, but my amortization calculation is “correct” otherwise, and I fill out a corrected 5329 each year, am I still okay in the eyes of the IRS? I’d rather not do something that Fidelity doesn’t support, but does the IRS care about what goes on behind the scenes with the payment?
(And yes, I realize you guys can’t speak for what the IRS will or will not do.I’d also not want to continue with such a plan and get audited in the fifth year and get busted on some glitch I didn’t know about.)
Thanks for any clarification folks can provide!2017-08-01 17:31, By: Ms.Tessie, IP: [22.214.171.124]
L2: Are you limited to required minimum distribution method w/ SEPPs from 401K?Before you do anything further, there are a couple of other issues to consider :
1. Are you separating from service from your employer ? If so, will you be 55 by 12/31/2017 ? If so, then you do not have to set up a SEPP 72-T, if your employer allows you to remain in their plan, and will allow you to take partial distributions of varying amounts at various times upon your request. This not only eliminates the need to set up a plan, but it also avoids the 10% penalty for early distributions before 59 1/2.
2. If the 401-K plan has employer stock as one of the investments, then research the NUA (Net Unrealized Appreciation) provision of the IRS Tax Code. ( See J K Lasser Your Income Tax, which has an excellent 2-page narrative, as well as the IRS, and google it. I saved a client over $ 100K with this approach.) Many/most plans do have employer stock because companies make their matching contributions this way, and employees also sometimes are allowed to do their own contributions by investing in company stock.) The HR or fund administrator must give you the applicable “cost basis” figures, and you can then determine the current value of those shares, and this “Appreciation”.2017-08-01 17:47, By: dlzallestaxes, IP: [126.96.36.199]
L3: Are you limited to required minimum distribution method w/ SEPPs from 401K?Hidlzallestaxes,
Thanks for your reply. I’d already posted before, but I should clarify in each post that I’ve already separated from service with this employer, an educational institution, but they let me keep my 401K plan in place. Also, there are no company stocks in play in my situation.
Hope that helps!
Ms.Tessie2017-08-01 18:06, By: Ms.Tessie, IP: [188.8.131.52]
L4: Are you limited to required minimum distribution method w/ SEPPs from 401K?I thought you might have already answered it.
Since you worked at an educational institution, are you sure it isn’t a 403-B plan, rather than a 401-K, or was it a profit not a non-profit employer ?2017-08-01 18:13, By: dlzallestaxes, IP: [184.108.40.206]
L5: Are you limited to required minimum distribution method w/ SEPPs from 401K?Hidlzallestaxes,
I’m asking specifically about a 401K plan through a university employer.(I worked for a research lab managed by the university, but it’s all nonprofit.)
Thanks for any clarification you can provide on what Fidelity is telling me!
2017-08-01 18:36, By: Ms.Tessie, IP: [220.127.116.11]
L2: Are you limited to required minimum distribution method w/ SEPPs from 401K?Q 1, 2) The 3 approved IRS calculation methods apply to all types of plans. That said, any employer plan can restrict distribution options as they choose for partial distributions. The RMD method not only results in having to do a new calculation every year, but the calculation typically results in about 35% lower distribution than the 2 other fixed dollar methods. Therefore, the plan can restrict you to the RMD method as a plan restriction which is NOT an IRS restriction, but this is rare and you may want to discuss this with a plan rep at a higher level.
Q 3) All this IRS cares about is that your distribution meets one of the 3 approved methods. The 5329 is only needed if the 1099R reporting the distribution does not indicate Code 2 in Box 7. The taxpayer then needs to file a 5329 to override the 1 code with exception code 02. This applies for any of the 3 methods. You might ask Fidelity if they provide Code 2 if you use the RMD method they require. If not, you would need to file a 5329 anyway like most 72t plan participants do. Also ask them if they will allow you to use the amortization method to determine your fixed distribution, but will just not support the plan or whether they will not even allow you to take a partial distribution at all unless it is based on the RMD calculation. Note that the actual plan compliance is between you and the IRS, and does not require plan support. It only requires that your distribution is correct, no contributions are made to the plan, and your calculations were done correctly. Ask Fidelity what they do different to support a 72t plan they know about vs. someone who does not even tell them about their plan. Plan support often amounts to nothing different.2017-08-01 18:47, By: Alan S, IP: [18.104.22.168]
L3: Are you limited to required minimum distribution method w/ SEPPs from 401K?Thanks so much for your thoughtful reply, Alan, and thanks also todlzallestaxes for weighing in.
It can be challenging to find a way to talk to someone higher up at Fidelity about what restrictions they put on their 401K plan, but that’s an option, especially if they have some kind of Ombudsman program. Apparently the people making these decisions and rulings are in a “back office” that neither I nor the the reps I speak with can talk to directly.
While I do believe that I’ve set everything up correctly, I’m not sure I’ve got the confidence (or intestinal fortitude) to proceed without Fidelity acknowledging that they understand where I’m coming from regardless of what code they use on a 1099-R. However, I will pursue asking the questions you mentioned, because they are worth exploring.
If the best solution in the end is to do a 72t plan from an IRA, I’ll make sure to research options at Fidelity, Vanguard, and Schwab to find the best fit for me.
Thanks again and kind regards,
Ms.Tessie2017-08-01 19:19, By: Ms.Tessie, IP: [22.214.171.124]
L4: Are you limited to required minimum distribution method w/ SEPPs from 401K?There have been numberous postings from people having problems dealing with Fidelity. On the other hand, there have been many favorable comments about dealing with Vanguard, and very few complaints. Vanguard seems to understand SEPP 72-T plans better than Fidelity personnel.2017-08-01 20:41, By: dlzallestaxes, IP: [126.96.36.199]
L5: Are you limited to required minimum distribution method w/ SEPPs from 401K?The individual is ultimately responsible to the IRS for following the rules of the SEPP. I use Fidelity and have never really cared what they thought. I’ve been reading on this site since 2006 and felt confident when I started my SEPP in 2012. Follow the information found here and ask questions if you need to but your custodian doesn’t even need to know really. Alan and Dlz, you guys rock. GFW, will you let one of younger guys host the site when it is time?2017-08-01 22:10, By: Scott, IP: [188.8.131.52]
L5: Are you limited to required minimum distribution method w/ SEPPs from 401K?I had the same issues with Fidelity in setting up my 72T. One of the Fidelity representatives, who formally worked for Met Life, instructed me to use your website for guidance in setting up my 72T. I spent many a hour researching your site, tools and comments before calling Fidelity back and instructing them on what I wanted. I’m into my 4 year of my 72T without a hitch. My opinion is Fidelity wants no responsibility for giving instructions on setting up a 72T should a mistake be made on their advice.2017-08-02 01:12, By: Willbeone, IP: [184.108.40.206]
L6: Are you limited to required minimum distribution method w/ SEPPs from 401K?Thanks Scott and Willbeone and dlzallestaxes,
Glad to hear I’m not alone.
Scott and Willbeone—Can you clarify whether you set up your 72t plans through an IRA or your Fidelity 401K plans? I think all of my trouble comes from trying to set up a 72t plan through Fidelity using my 401K.
I’ve actually invested a lot of time on this site and researched the hell out of the 72t option before attempting a 72t plan with my Fidelity 401K. My calculations are correct given all the info here and also based on double-checking them on other calculations (and also running the IRS examples on various calculators.)
The first SEPP withdrawal was made (after I was told by Fidelity that they weren’t actually moving forward with my paperwork, and I certainly didn’t resubmit my paperwork), and now Fidelity seems sure that I owe the 10% early withdrawal tax because their position is that the only kind of 72t SEPP payment that can exist using the form I used (and was told to use) with a 401K is based on the RMD method. They’ve not explained what other form I could have used.
Sounds like Scott would not be sweating these details but simply submitting a 5329 at tax time and getting on with his life. 🙂 Me, I worry.2017-08-02 02:27, By: Ms.Tessie, IP: [220.127.116.11]
L7: Are you limited to required minimum distribution method w/ SEPPs from 401K?Ms Tessie,
Might I suggest you read the first paragraph of revenue ruling 2002-62 found after clicking on 72t/72q Plans at the top of the page. There it explains that my rollover IRA and your 401k are treated the same.2017-08-02 20:01, By: Scott, IP: [18.104.22.168]
L8: Are you limited to required minimum distribution method w/ SEPPs from 401K?Thanks for the support, Scott. I wanted to clarify whether you used an IRA because Fidelity seems to be saying via all the troubles I’m having that they only do a 72t from an IRA plan, and I’m left feeling that I wouldn’t be having these issues if I had gone the IRA route rather than setting up the 72t plan with my 401K.
I myself understand, and I’ve confirmed on this site, that you can have a 72t plan from a 401K, though Alan pointed out upthread that some plans could place some limitation on distributions, though it’s rare.
Rev. Rul. 2002-62 is the one document I didn’t FAX over to FidelityI already sent them theIRS 401(k) Resource Guide and theIRS Retirement Plans FAQs Regarding Substantially Equal Periodic Payments, which provide the same info I should think.
2017-08-02 22:20, By: Ms.Tessie, IP: [22.214.171.124]
L9: Are you limited to required minimum distribution method w/ SEPPs from 401K?Is it worth all of the angst to continue to deal with Fidelity, rather than just transferring your account to Vanguard, and sleep peacefully ever after ?2017-08-02 22:24, By: dlzallestaxes, IP: [126.96.36.199]
L10: Are you limited to required minimum distribution method w/ SEPPs from 401K?I’ve never even asked Fidelity. I take my annual draw and get my 1099 with box 7 checked with a 1 and file my 5329. You do not need their approval as it is your money. I just make sure to keep enough cash in the account and linked it with my checking account for electronic transfer. I live year to year and not month to month and my SEPP supplements my Carpenters union pension and won’t be needed once I’m 62. I’m thinking about continuing to draw a similar amount thought to reduce RMD’S in the future.
Again, you do not need Fidelity’s blessing.2017-08-02 22:38, By: Scott, IP: [188.8.131.52]
L11: Are you limited to required minimum distribution method w/ SEPPs from 401K?Understood, Scott—thanks!2017-08-02 22:44, By: Ms.Tessie, IP: [184.108.40.206]
L10: Are you limited to required minimum distribution method w/ SEPPs from 401K?Responding to dlzallestaxesYes, it’s certainly worth thinking aboutthe best use of my time in sorting out this issue. I want to make sure I’m not hit with a 10% penalty on this distribution that’s already occurred, but given Scott’s position, which I respect as someone who’s successfully 72t-ing, that shouldn’t be an issue (even though Fidelity is telling me I did things wrong, which I didn’t as far as I can tell,and they’ve had a lot of miscommunication on their end).
dlzallestaxesWhat would I do with the distribution that was already paid out?
I didn’t get a chance to clarify things with Alan, but he responded on a previous thread with the following that was a bit confusing to me, because in the section I’ve bolded below it sounds like he’s saying I can roll over the current distribution to an IRA, but then he says you can’t roll a SEPP distribution over:
“A plan from your 401k is legal, but there are more risks and less control than you would have had with an IRA plan. If you need to you could roll over the current distribution to your IRA as Fidelity may or may not accept that money back. However, since you cannot roll a SEPP distribution over, a rollover would delay the start of your SEPP to August, reduce your interest rate max to 2.35 and require you do use a new account balance after the distribution which would be reduced by the amount of your distribution plus any market value changes.You would also need to replace the withheld amount to have a complete rollover of this distribution. In other words, you would have to reboot and start over.”2017-08-02 22:42, By: Ms.Tessie, IP: [220.127.116.11]
L11: Are you limited to required minimum distribution method w/ SEPPs from 401K?Ms Tessie, my point there relates to an earlier thread in which you were not sure whether Fidelity had made a distribution on 7/25 or not. If they did, then you would receive a distribution from a plan that you might not wish to maintain a 72t plan with. Rather than being stuck with a distribution that would be subject to penalty, you could prevent that by rolling it over to an IRA, then move the rest to an IRA and start your plan from the IRA.
Also, Fidelity is likely just the plan administrator for the employer. As administrator, this is not Fidelity’s plan but they have to administer the employer plan as it was written. In this scenario, Fidelity may just be the messenger of a strange restriction in the plan document.2017-08-02 23:11, By: Alan S, IP: [18.104.22.168]
L12: Are you limited to required minimum distribution method w/ SEPPs from 401K?Thanks again to Alan anddlzallestaxes for your input and for clarifying things.
And many thanks to Gfw for hosting the site!2017-08-04 05:06, By: Ms.Tessie, IP: [22.214.171.124]
L11: Are you limited to required minimum distribution method w/ SEPPs from 401K?I don’t remember how much your initial distribution was. Let’s say it was $ 2,000. Assuming you were in the 25% tax bracket, the tax on that will be $ 500. If you decided to “start over” by “rolling over” your remaining 401-K by an electronic trustee-to-trustee TRANSFER, then you would have a 10% penalty of $ 200 ( $ 2,000 * 10%). Then you would start with a NEW PLAN with Vanguard, Schwab, or whoever.
Your extra cost of doing this would be the $ 200 penalty !!!!2017-08-03 04:53, By: dlzallestaxes, IP: [126.96.36.199]