L1: deposit timingI turned 55this july and retired on Nov 2nd this year. Lump sum payout will be mailed to me(made out to Vanguard) on Dec 3rd. Iplan to use this as my 72t for next year. 401k (no stock options)wont allow partial withdrawalsits all or nothing. So I will open a second smaller IRA in Jan next year. How long do i have to deposit the lump sum and should i do it in Dec this year or Jan 2011? any advantages/disadvantages on this?2010-11-19 03:19, By: mbw, IP: [22.214.171.124]
L2: deposit timing1. The deposit of a 401-k rollover/transfer to an IRA is not a taxable event.
2. The rollover/transfer must be deposited within 60 days, but I would not wait at all. Your 401-k company will issue a 1099-R for the year in which they issued the check, ie 2010, regardless when you deposit it. The “cleanest” approach is to deposit it in the same calendar year. The receiving company, Vanguard, will report the deposit of the rlooover.transfer on a form 5329 which is issued for transactions on a calendar year. By depositing it in 2010, the IRS will receive 2 independent forms which will show the same figure on either side of the transaction.
3. Technically, a “rollover” occurs when the check is made out to the taxpayer. A “tristee-to-trustee transfer” occurs when the transaction is handled electronically, but it also covers your situation where the check is made out to the other institution, and you are merely carrying the check from one institution to another because someone has some unknown reason for not doing it electronically.
4. The SEPP 72-T starts with the first distribution of any amount from the IRA account. As of that date, you must have established the IRA balance(s) that you are including in your “SEPP UNIVERSE”. This date must be “reasonable” in relation to your starting date. If you are taking your first distribution in Jan 2011, then the 12/31 balance is definitely appropriate.
5. The “2nd SEPP 72-T” must be from a separate IRA account. If you have enough IRA balances to cover the 2 SEPP 72-T plans, then leave some balance in a 3rd IRA account for emergencies.
6. If you do not need the additional money immediately early in 2011, you might want to give yourself some flexibility by waiting a few months, say until April. Then you can start by taking 1/9 of the annual distribution for that 2nd SEPP 72-T, knowing that you can take out an extra 3 month’s of distributions later in 2011 so that you have a full year’s distribution in 2011 from the 2nd SEpp 72-T, even though you started it in April, for example.2010-11-19 04:43, By: dlzallestaxes, IP: [126.96.36.199]
L3: deposit timingThanks. To clarify i am only going to use lump sum chek in dec for 72T. The 401k wont be closed out till jan/feb 2011 and i wont be using that for anything but a safety net i guess. so again if i dont deposit the lump chek until jan would that be better than doing it in this calendar year or does it matter?2010-11-19 04:53, By: mbw, IP: [188.8.131.52]
L4: deposit timingAs I said, it is better to Deposit it in Dec ASAP after you get it. This way the 1099-R from your 401-K company for the check, and the 5329 from Vanguard to report the deposit, will both be in the same calandar year. Otherwise, you might have to waste time and money corresponding with the IRS to explain why you did not report the 1099-R distribution on your 2010 tax return.
Also, if you became disabled or died before depositing it, then it would all become taxable in 2010, There is no valid reason not to deposit it immediately, which is what would occur if the employer would do an electronic trustee-to-trustee transfer.
By the way, you now added another “clinker” to your scenario.
BUT, AND IT’S A BIG BUT YOU ARE NOT DOING A “LUMP SUM DISTRIBUTION” OF YOUR 401-K. YOU MUST COMPLETELY LIQUIDATE YOUR 401-K IN THE SAME CALENDAR YEAR FOR IT TO BE A “LUMP-SUM DISTRIBUTION”. THAT IS WHAT “LUMP-SUM” MEANS.
Further, make sure that the check is made payable to Vanguard. If it is made payable to you, and you are planning to endorse it, and deposit it at Vanguard, then your employer is REQUIRED to withhold 20%. Even though you would get this money back when you file your tax return next year, you will have to come up with this amount from other sources because a rollover requires you to deposit the identical GROSS AMOUNT. If not, you will be taxed on the withholdings that you did not rol over.
For example, if you have $ 500,000 in your 401-K, you will receive a check payable to you, then it will be for $ 400,000, and the company will send $ 100,000 to IRS as withholdings. If you then endorse the check, and put it into your own checking account for a day or a few weeks, and deposit this check or your own check for the $ 400,000 you received, you will be taxed on the $ 100,000 not “rolled over”, unless you write a separate additional check for $ 100,000.
What you should do to accomplish your goals, is to deposit the full check (for $ 500,000 in my example) into your IRA account. Then set up a 2nd IRA account. Determine how much you want or need in distributions each year, and use the reverse calculator on this website to determine how much you need to have in your your SEPP 72-T to allow that distribution. Then transfer the amount in your IRA inb excess of that figure into the 2nd IRA for emergencies or future additional SEPP 72-T or emergencies.2010-11-19 18:41, By: dlzallestaxes, IP: [184.108.40.206]
L5: deposit timingDlz,
It sounds to me like the “lump sum” he is referring to is what he chose to getin lieu of taking his pension as an annuity, and the 401k is a separate account he has, which he will be rolling over in 2001 to a different IRA. I agree with you that a Dec payout of the lump sum should be matched with a Dec deposit to the IRA to simplfy tax year reporting matches. Ken2010-11-19 20:08, By: Ken, IP: [220.127.116.11]
L6: deposit timingYou may be more perceptive than I am. It would have been nice if he said that he had both plans, and this was what he was doing with each plan.
Usually there is more in a 401-K, but you may be right that the pension paln was his primary one, and that the company added a 401-K in recent years, and that is why it hasa significantly less, and will be his emergency fund.2010-11-19 21:49, By: dlzallestaxes, IP: [18.104.22.168]