Distributions from non-SEPP account

L1: Distributions from non-SEPP account
DOB is 9/16/1960, new plan to start Jan 2018
If I split my IRA into two accounts and take my SEPP from one of them, can I take penalty free withdrawals from the non-SEPP account after age 59 1/2, prior to the end of the SEPP?
2018-01-19 08:37, By: ps, IP: [73.78.246.228]

L2: Distributions from non-SEPP account
Yes you can.
2018-01-19 12:47, By: Red Baron, IP: [24.171.38.187]

L3: Distributions from non-SEPP account
Yes. That is one of the reasons we recommend splitting your IRA, in addition to using the 2nd one for emergency funds before the 5-year or 59 1/2 termination of a SEPP.
2018-01-19 17:16, By: dlzallestaxes, IP: [173.75.252.16]

L4: Distributions from non-SEPP account
It appears that I won’t be taking my first distribution until either this month (Feb) or March. I’ll be using the RMD method and taking monthly distributions.
For IRS purposes, does it matter whether I prorate the amount that I take in 2018, or do I take the full year’s amount?
2018-02-06 21:09, By: ps, IP: [73.78.246.228]

L5: Distributions from non-SEPP account
No, it’s your choice. Look at the tax effects. It might make sense to take the full 12 mo, and set aside some of it in case you need it for an emergency before you are 59 1/2.
However, if you were my client, I would try to convince you to try to figure out a way to get to March 2020 without using a SEPP 72-T.
2018-02-06 21:51, By: dlzallestaxes, IP: [173.75.252.16]

L6: Distributions from non-SEPP account
Well, the SEPP wasn’t my 1st choice, of course, being so close to 59 1/2. I did explore a home equity loan; my house is paid off, but no one would give me a loan without income. If I had income, I wouldn’t need aloan. And it’s apparently not legal to borrow against an IRA. I’ve gone through all of my non-IRA holdings and extracted all but $1000 of the principle of a Roth.
I retired at 41 – I’m now 57 with 1.2 million in IRAs. My house and cars are paid off, I have no long term debt, with total living expenses of $20,500 last year. The thought of going back to work, the obvious solution, just doesn’t do much for me. If you have any other solutions, I’m all ears.
2018-02-06 22:42, By: ps, IP: [73.78.246.228]

L7: Distributions from non-SEPP account
I hope that my response didn’t come off as belligerent or flippant. The reality of my situation is that I just don’t think I have any other options, other than going back to work.
At any rate, is there a best time of the month to start my distributions? I was thinking mid-month.
2018-02-09 19:38, By: ps, IP: [73.78.246.228]

L8: Distributions from non-SEPP account
No issue. You discussed that you had considered other options, and that they were not viable in your situation. Too many people make quick decisions without considering the options.
Usually between the 10th and 20th is ideal, so you don’t run into an issue in late Dec. or early January with a distribution being paid in the wrong year because of 12/30, 12/31, 1/1, or 1/2 falling on a weekend. Also, you don’t want your Dec distribution to be late in the month in case there is an error. You want time to have it corrected before 12/31 so that the annual total is correct.
2018-02-09 19:47, By: dlzallestaxes, IP: [173.75.252.16]

L9: Distributions from non-SEPP account
See this article on the Solo 401k parachute for those between 55 and 59.5. Do a Google search on Solo 401k parachute۝ and look at the Gubmints web site.
2018-02-09 19:56, By: sm98, IP: [71.84.14.13]

L10: Distributions from non-SEPP account
The Solo 401k option works as follows:
1) Open aSolo 401k. You will need to do a couple of weeks of short-term employment, so set up the Solo 401k to receive a couple of payments from your wages.
2) Deposit some wage income into the Solo 401k, such as by driving Uber.
3) Rollover the amount you need from an IRA to the Solo 401k. Make sure that the Solo 401k plan you establish accepts IRA rollovers.
4) Fire yourself as an Uber driver. This is key as you must “separate from service” at age 55 to 59.5. A 401k allows withdrawals without the 10% penalty at age 55, if you separate from service; an IRA does not allow this. This exemption is in “72(t)(2)(A)(v) made to an employee after separation from service after attainment of age 55” which you can see on this web site.
The Gubmints web site referenced earlier has a great deal of detail on this. Google search “Solo 401k” for an article entitled:
“Retire Early using the Solo 401k Parachute”
2018-02-09 22:04, By: sm98, IP: [71.84.14.13]

L11: Distributions from non-SEPP account
Generally, this would work if you are self employed, but not if you are an employee. Uber is not the best example because there are conflicting court decisions in many states over the independent contractor vs. employee status of Uber drivers. If the drivers are found to be employees, they cannot open a solo K for this employment.
2018-02-10 01:17, By: Alan S, IP: [24.117.172.15]

L12: Distributions from non-SEPP account
Well, pick some employer that allows rollovers into their 401k plan, rollover the IRA as much as needed to bridge to 59.5, then separate from service. Some employers have restrictions on how long you need to work before you can contribute to the 401k plan.
2018-02-10 01:28, By: sm98, IP: [71.84.14.13]

L13: Distributions from non-SEPP account
The Solo 401-K “Parachute” approach has been around for a number of years. The article is misleading. If you are working for a company, and you have a 401-K already, then you do not need to use the Solo 401-K plan because you could just “separate from service” in the year that you will become 55 (or older). Of course, your employer must allow you to continue to be a member of their plan, as well as allow periodic withdrawals at your request.
The Solo 401-K approach is really one that applies more to people who have an IRA, or are working for a company that does not allow partial distributions after leaving the company, and are retiring between 55 and 59 1/2. The idea is simply to set up a company doing anything as a sole proprietor/independent contractor, and soon after starting, set up a Solo 401-K plan for that company. Then, do an electronic trustee-to-trustee transfer from your IRA to your new company Solo 401-K. It would be best to continue earning some income by working for a year or two before “separating from service” from your own company. By doing this, you might be able to fight any possible attack by the IRS as to the viability of your plan.
2018-02-10 02:11, By: dlzallestaxes, IP: [173.75.252.16]

L14: Distributions from non-SEPP account
Yes, the Solo 401k is the way to do this. The person asking the question does not, apparently, have a 401k with separation from Service at/after 55, so there are two options:
1) conventional 401k with a new employer and a rollover of an IRA into that 401k, followed by separation from service or
2) the Solo 401k approach discussed above
A person can not continue working because separation from service is required. The sequence is:
1) establish Solo 401k
2) work at new job and contribute wages
3) rollover IRA to Solo 401k
4) separate from service
5) withdraw without 10% penalty
Consult CPA first.
2018-02-10 02:22, By: sm98, IP: [71.84.14.13]

L15: Distributions from non-SEPP account
I doubt if #2 under sm98’s response will work. You cannot work for a company and “contribute” your wages from that job to your own Solo 401-K.
2018-02-10 02:44, By: dlzallestaxes, IP: [173.75.252.16]

L16: Distributions from non-SEPP account
One way or another, a 401k is the only way to eliminate the 10% penalty with unrestricted use of the funds. That is the direction the person who posted the initial question needs to go as only a 401k will allow for such use between 55 and 59.5.
2018-02-10 02:50, By: sm98, IP: [71.84.14.13]

L17: Distributions from non-SEPP account
Another option with the Solo 401k or employee 401k is to take a loan if the plan allows, up to $50,000 with a maximum ratio of 50% of the account balance.
1) Setup Solo 401k
2) Rollover $100,000
3) Borrow $50,000 from the plan
4) You will need to make repayments at least quarterly at a reasonable interest rate, e.g. prime plus margin, over an amortization period of 5 years.
That could stall you out to 59.5, at which time you can pay the loan off in full.
2018-02-10 03:57, By: sm98, IP: [71.84.14.13]

L18: Distributions from non-SEPP account
Interesting idea. One clarification — While you do have to make at least quarterly interest payments, you do not have to make any principal repayments during the 5 year period, but you must repay the entire loan by the end of the 5 year period. If you do not need all $ 50,000 initially, you could take loans as you need it, say at $ 10,000 per year. I think that you could even “play the game” by taking $ 10,000 per year, and use the 5th year’s loan to repay the 1st year’s loan, and just keep it going for many years that way.
2018-02-10 06:38, By: dlzallestaxes, IP: [173.75.252.16]

L19: Distributions from non-SEPP account
My apologies – I let this get away from me, as I don’t have email notifications enabled.
I do have some income – it’s not much, maybe $1000/year for which I get a 1099-Misc.. I don’t know if I could set up a solo 401k based on that. Would the solo 401k loan require paying taxes on the amount I borrow?
It seems fairly complicated, even compared to a 72t, although $50,000 would get me through ’till 59 1/2.
2018-02-14 00:34, By: ps, IP: [73.78.246.228]

L20: Distributions from non-SEPP account
I spent some more time reading up on this.
1) There is no tax on the $50,000 that you would borrow and repay as this is not a distribution, but a 401k loan.
2) Make sure the plan allows for loans. Numerous companies sponsor them, including Vanguard. Vanguard does not charge anything to set up the account and charges $20 annually. However, Vanguard does NOTallow for loans. When investment companies offer the plans, the way they make their money is by forcing you to select from their funds and loans decrease the amount of your money that generates income for them. This is fine as they have to make money somehow. You want one of the independent companies that creates 401k IRS-approved plans, and they will have long IRS-approval letters with them; you pay a fee to use the plan documents, effectively, and can then turn around and invest in Vanguard if you wish. (I know that sounds convoluted, but it has to do with how the various entities make their money.)
One company I found that offers these is IRA Financial Group (Google it); I am sure there are others. It is not immediately obvious from their web site what their setup fees are, so you may have to shop around.
The book you want is for $9.99 Kindle edition or $19.99 paperback.
Going Solo – America’s Best-Kept Retirement Secret for the Self-Employed: What Financial Institutions Won’t Tell You About Saving for Retirement
So, the steps then are:
1) Figure out what Solo 401k plan will allow for loans. I checked Vanguard’s documents and their plan does NOT.
2) Establish aSolo 401k plan that allows for participant loans, paying the fees necessary to do so. The plan must also allow for inbound rollovers from an IRA, which most will, but do check.
3) Open a separate investmentaccount with the Solo 401k plan documents.
4) Deposit some bona fide 1099 net income into the Solo 401k. Your tax returns must show positive net income in that tax year from the self-employment activity. You must also, yourself, not have employees.
5) Rollover at least $100,000 if you want to borrow $50,000. (The plan must accept rollovers as well.)
6) Take out the $50,000 loan, repaid over 5 years at a reasonable interest rate (prime rate). This must be a fully amortizing loan. You can not make interest only payments. A 6% loan at $50,000 will have monthly payments of $966.64 over 5 years. So, if you have 18 months to age 59.5, you will lost 18 x $966.64 from available funds. The 401k plan you select may allow for multiple loans, like 2, so you could stage the loans as you need the money.
7) When you turn 59.5 and not a day sooner, repay the loan in full.
This is technically detailed but totally viable. I believe you can create multiple Solo 401k plans as long as your employment is from different sources, which will allow you to get around the $50,000 loan limitation on a $100,000 balance. Check on this as I am not positive.
2018-02-14 01:03, By: sm98, IP: [71.84.14.13]

L21: Distributions from non-SEPP account
Thank you, sm98.
I think that #4 and #6 might be deal breakers, though. I could probably put a few hundred in each year as a contribution, but having to pay back the principal prior to 59 1/2 wouldn’t really leave me enough money to live on. If a balloon payment were possible, it could work.
2018-02-14 01:53, By: ps, IP: [73.78.246.228]

L21: Distributions from non-SEPP account
Let’s see if we can make this work.
User “ps”, here are the facts you stated above:
1) DOB 9/19/1960, so age 59.5 is 3/20/2020. We are coming up on 3/1/2018, so this basically needs to last two years AND generate pre-tax income of $20,500 per year.
2) Annual expenses: $20,500
3) $1.2 MM in IRAs
Let’s say you set up a Solo 401k that allows for inbound rollovers and loans, say a total of two outstanding loans at one time. Assume that the plan is setup 3/1/2018 with $1,000 in earnings. On 3/2/2018, $100,000 is rolled in from an IRA, in which you now have $1.2 million.
SCENARIO-1
Loan #1 is for $25,000 on 3/3/2018. On a $25,000 loan at 6%, over 5 years, your monthly repayments are $483.32 per month or $5787.84 per year. With a $25,000 loan #1 and expenses of $20,500 and repayment, first year, of $5787.84, your total expenses for year 1 are: $20,500 + $5787 = $26287. Loan #1 at $25,000 just about covers the first year.
Loan #2 is for $25,000 on 3/3/2019. Assuming prime at 6%, over 5 years, your monthly repayment is again $483.32, but you still need to make repayments on Loan #1. You monthly expenses are now: one-twelfth of ($20,500) + 2 x $483.32 = about $2674. If we divide the $25,000 by $2674, we get about 9.3 months, or basically, January 2020. Your fully paid with living expenses and loan repayments on both loans to January 2020.
At that point, you would have to withdraw, with a 10% penalty from your IRAs at $1.2 million, to cover three (3) months of living expenses with the loans: 3 x $2674 which is $8,022 and a 10% penalty of $802. In essence, what the 401k loans have done is limited the penalty from 24 months of expense(where you are now, if you were to withdraw and pay the monthly penalty) down to 3 months of expenses.
At age 59.5, you need to cover the loan balances and start coving your monthly expenses. You can pay the loans in full or you can keep paying monthly.
There are a couple of nuances here if you drag out
1) You are paying interest on Loan-#1 for 24 months and Loan-2# for 12 months. At 6% of $25,000,loan #1 will have a balance of $15887 and loan #2 will have a balance of $20579. So, at March 2020, you can pay off about $36,000 in loans from your IRA’s without penalty, or you can keep paying monthly. If you pay both loans in full, it may push you into a higher tax bracket. The INTERESTmoney that you pay back into the IRAs will be taxed AGAIN. At 6% on the two loans above is about $4,000 in interest, so you will pay about $500 (at your bracket, assuming no state income taxes) in taxes again.
2) The new tax law effective January 1, 2018, allows repayment on loans up until the filing date of you tax returns, after separation from employment. In theory, you could stop the self-employment work in March 2019 and stop payment on both loans at that time. However, you would need to pay both loans in full by April 15, 2020, which is when 2019 tax year returns are due. Check with your CPA to see how to handle separation from service and 401k loan repayment in a scenario like this.
At $20,500 in annual expenses, it is $1708 per month. At 10%, you would need pay penalties of about 24 months X $1708 X 10% = $4099 in penalties, unless your state imposes additional penalties. California (CA) imposes an additional penalty of 2.5%.
3) A cleaner solution is to find an employer that that accepts rollovers into their 401k and go work for that employer long-enough to allow them to take in the rollover.
For example, if Starbucks requires 3 months of employment to be able to contribute, go work at Starbucks for 3 months. Rollover about $50,000 into their 401k. Then quit, i.e., separate from service. Separation from service allows money to be withdrawn from a 401k without penalty at 55, not 59.5. Take the entire $50,000 as a distribution or do two years at $25,000 if they allow you to keep money in their plan after separation from service. The $50,000 will push you into a higher bracket.
4) The cleanest solution is to just withdraw monthly and pay, cumulatively, $4099 over the two years in the 10% penalty. Your $1.2 MM IRA portfolios should easily cover the $4099 in penalties.
2018-02-14 02:57, By: sm98, IP: [71.84.14.13]

L9: Distributions from non-SEPP account
Thank you SM98 for all the calculations. I think that the most straightforward way ahead is to just do the 72t, and fund it at some fairly minimal level, since 59 1/2 is only two years away, and I’ll have money in other IRAs that I can draw from then to make up any shortfall in income.
I may start with the amortization method, then switch to the RMD method at 59 1/2, which will reduce my distribution greatly and not tie up so much money in the SEPP IRA. I can then draw additional income from my other IRAs penalty free.
Am I required to take the distribution on the same day each month or is there leeway? If I start taking distributions monthly, can I ever change to say, quarterly, or even take two distributions in one month, and skip a month?
2018-02-21 20:14, By: ps, IP: [73.78.246.228]

L10: Distributions from non-SEPP account
Distributions can be taken in any amount, and at any frequency, just so long as the correct ANNUAL total is taken every year. Also, the amounts and frequency can change within each year, and can change from year to year.
2018-02-21 22:22, By: dlzallestaxes, IP: [173.75.252.16]

L11: Distributions from non-SEPP account
Because the IRS only gets the 1099-R with the annual total on it?
2018-02-22 03:00, By: ps, IP: [73.78.246.228]

L12: Distributions from non-SEPP account
CORRECT.
2018-02-22 03:05, By: dlzallestaxes, IP: [173.75.252.16]

L12: Distributions from non-SEPP account
Once you take the first SEPP distribution, you are locking up۝ the entire IRA account. The change to RMD still locks up the same amount; however, your withdrawal amount will change.
2018-02-22 03:05, By: sm98, IP: [71.84.14.13]

L13: Distributions from non-SEPP account
Yes, sm98, aware of that, and that’s OK, since I’ll have two other sizable IRAs.
If I start with the amortization method, I’ll be locking up less money in the SEPP IRA though, as the distributions are higher than RMD method. I’m assuming that the five year rule does not reset with a change in distribution method – that is, the first two years I would use amortization, then after 59 1/2 use RMD for the remaining three years.
2018-02-22 03:23, By: ps, IP: [73.78.246.228]

L14: Distributions from non-SEPP account
That’s correct. The change in calculation method does not affect the five year distribution time period.
2018-02-22 05:12, By: sm98, IP: [71.84.14.13]