Do Reinvested Dividends Bust a SEPP plan?

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L1: Do Reinvested Dividends Bust a SEPP plan?
I retired this year at age 54 and am planning to start a 72(t) SEPP plan. I have moved my company 401K into a rollover IRA. My portfolio includes a significant amount of my former employer’s stock which I have kept in-kind as stock in my new IRA. If I elect to reinvest dividends from my employer’s stock into my IRA is that considered an “addition to the account balance” and thus will it bust the SEPP plan?
2018-07-12 17:47, By: markw, IP: [2601:246:8101:fa31:19bd:8a1c:9202:991f]

L2: Do Reinvested Dividends Bust a SEPP plan?
No. You can do anything that you want with the income and securities within an IRA, even if it is a SEPP 72-T plan.
However, why did you roll over your 401-K into an IRA ?
If you will be 55 before 12/31/2018, you could have, should have, left your 401-K plan account intact because you would have been eligible for the “55 rule”, so long as your employer’s 401-K allowed you to stay in the plan, and also would allow you to take periodic distributions, which would not have been subject to the 10% penalty.
Further, regardless of the above, you should have checked with your HR department for the cost basis of the employer shares in your 401-K account. Assuming they had appreciated over the years, you should have utilized the special provisions of the IRS code for “NUA” (Net Unrealized Appreciation of Employer Stock). I saved a client $ 100,000 in federal income taxes on is $ 750,000 401-K plan when he retired from Merck several years ago. I’m not sure if you can roll back your 401-K securities, or even the full IRA account include previous amounts in your IRA, but ask your employer and plan administrator, and check with your tax advisor of you would then still qualify for NUA tax provisions. (Maybe Alan can answer that aspect.)
2018-07-12 19:44, By: dlzallestaxes, IP: []

L3: Do Reinvested Dividends Bust a SEPP plan?
dlzallestaxes, thanks for the response. So it sounds to me like the dividends received and reinvested within an IRA are considered “investment gains”, and thus are not the same thing as “contributions” added from outside the account. Is that correct?
Quote from RR 2002-62:
(e) Changes to account balance. Under all three methods, substantially equal periodic payments are calculated with respect to an account balance as of the first valuation date selected in paragraph (d) above. Thus, a modification to the series of payments will occur if, after such date, there is (i) any addition to the account balance other than gains or losses, (ii) any nontaxable transfer of a portion of the account balance to another retirement plan, or (iii) a rollover by the taxpayer of the amount received resulting in such amount not being taxable.
Relative to keeping my funds in the 401K vs. and IRA, I wanted to have more flexibility and control to invest so that’s why I moved it. The IRA’s 72(t) SEPP gives me essentially the same capabilities as the 401K 55-rule for my situation (i.e. I’m OK with a fixed income for the next 5 years and am not going to be taking a lot out anyway).
Also, I seriously considered doing an NUA distribution on my company stock. I understand the situation you describe but with the small annual distributions I plan to make it didn’t really make sense for me to do the NUA withdrawal. I did a modeling of my income needs and the taxes that would need to be paid today and over the long term, and it turned out that the taxes that would be due on the basis now would not be recouped for many many years (with the capital gains ‘savings’ as compared to the normal income tax rate). Add to that the lost growth opportunity on the taxes paid on the basis today plus any capital gains taxes on the distributions I would need make to ‘sell’ the stock if I wanted to diversify and I concluded that it’s not worth it in the long run.
2018-07-12 23:00, By: markw, IP: [2601:246:8101:fa31:19bd:8a1c:9202:991f]

L4: Do Reinvested Dividends Bust a SEPP plan?
You are correct that dividends or cap gains within the IRA are not considered contributions and would not trigger a Form 5498 reporting a contribution to that IRA.
You need to match up your intended SEPP distribution amount to the account balance needed to generate that distribution. If your account balance is too large, then a non reportable transfer of the amount on which you want your SEPP calculated should be done to a new IRA account before you start your plan. The first IRA can then be tapped for emergency needs if you need more than your SEPP amount.
It sounds like you have retained most of the employer shares in your IRA, so you may be over concentrated in that holding. One of the benefits of the IRA rollover is that you can diversify your IRA by selling the employer shares and replacing them without having any tax bill due and without affecting your SEPP. Had you utilized NUA, selling the shares to diversify would have triggered cap gains tax, perhaps even in the same year as the tax on the cost basis was due.
Finally, with respect to dlz’s question, even if you wanted to, and even in the unlikely case where your old plan would accept an IRA rollover from a separated employee, you would not have a second chance for NUA. Once the employer shares are rolled to an IRA account, the NUA potential is extinguished and cannot be restored, as the former plan would have to account for this as a rollover contribution of the shares. You are not interested in this in any event.
2018-07-13 00:08, By: Alan S, IP: []

L4: Do Reinvested Dividends Bust a SEPP plan?
If you “are not going to take out much anyway”, then you should follow Alan’s advice and separate your IRA into one for your SEPP based upon using the “reverse calculator” on this website to determine the maximum amount you will need in your SEPP, and transfer the rest into another IRA account for future emergencies, and separate investment strategies.
As far as NUA, for future info for others, this strategy is most beneficial if the appreciation was more than 25%. It is not effective for smaller gains. For example, if the cost basis is $ 100,000 and the value of the employer shares is $ 1,000,000, then you roll over all of these shares to a non-retirement account. You pay ordinary income taxes on $ 100,000. The sale of any of these shares at any time, even the next day, is taxed at LONG-TERM CAPITAL GAINS RATES up to the value on the date of transfer. Future gains above that value per share is taxed at short-term rates for the first year, and then long-term rates. For my client, I transferred these shares into a margin account, and took tax-free withdrawals for the first year or so. Then I sold shares while keeping him in the 15% tax bracket, so that there was -0- capital gains tax for several years, and paid off the margin loan. In addition, the addition of $ 1,000,000 into that non-retirement account permitted the ability to do extensive diversification by using the margin for investing in other securities.
2018-07-13 05:58, By: dlzallestaxes, IP: []

L2: Do Reinvested Dividends Bust a SEPP plan?
Dear Markw,
When youwerereceiving dividends from your employer’s stock in your IRA,
did you have to paya 10% penalty, plus income tax……or in other
words, can a person elect to have dividends go directly to a taxable account
instead of increasing an IRA, and without a 10% penalty?
2018-07-14 03:20, By: 72TIRED, IP: [2600:1700:de20:6240:4dc7:1d46:10b3:e71e]

L3: Do Reinvested Dividends Bust a SEPP plan?
72TIRED, I have not yet received dividends in my rollover IRA. My original question arose due to the IRS quote relative to 72(t) accounts: “…a modification to the series of payments will occur if, after such date, there is (i) any addition to the account balance other than gains or losses…” I wanted to know for sure that dividends are considered gains in this context. I certainly didn’t want to receive dividend payouts and owe a 10% penalty or worse yet bust my SEPP plan. From the responses I received it’s clear that dividends within an IRA are gains. So the bottom line is compute your SEPP payout using the calculators and advice on this site and let the dividends compound away!
BTW, I did receive dividends in my 401K but they were always reinvested. I may have had a choice to take the 401K dividends as taxable income payouts at the time, but I don’t know if a 10% penalty would have applied – maybe someone else can answer this question. Either way, my savings compounded nicely and this is water under the bridge for me since I am retired now (yay!).
2018-07-14 15:31, By: markw, IP: [2601:246:8101:fa31:4440:3f8f:bb9b:e60]

L4: Do Reinvested Dividends Bust a SEPP plan?
All dividends on any investments in a 401-K, IRA, or any other retirement plan are paid into the retirement plan directly by the company or mutual fund issuing the dividends. There isn’t any way that any of these dividends would ever be paid directly to a taxpayer. The taxpayer does not “own” these investments; the retirement plans “own” the investments.
Dividend “re-investments” are really dividend payments in cash initially, and then used to purchase additional shares of the same security which paid the dividends. You, or the plan, could have elected to have those cash dividends to be accumulated as cash to be used for distributions, or used to buy any other investment within the retirement plan.
Dividends within plans are not taxable income when received by a plan. Taxpayers are taxed only on DISTRIBUTIONS from retirement plans. The 10% penalty for early distributions apply to any withdrawals before 59 1/2, unless any of the numerous exceptions to the penalty apply.
2018-07-14 22:21, By: dlzallestaxes, IP: []

L5: Do Reinvested Dividends Bust a SEPP plan?
Dear Dlzallestaxes,
We the People of the United States, in Order to form a more perfect Union, establish
Justice, insure domestic Tranquility, provide for the common defence, promote the
general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,
do ordain and establish that the freedom we the People have in after-tax investing be
the same freedoms in pre-tax investing, whereas, we the People shall choose,
to direct Any cash dividends into Income…….so help me God!
2018-07-16 20:29, By: 72TIRED, IP: [2600:1700:de20:6240:31c7:94a1:9ed3:d88d]

L6: Do Reinvested Dividends Bust a SEPP plan?
If you direct cash dividends into income in such a way that your net annual withdrawals do not match the formulas, you have a good chance of personally funding, through massive penalties, all of the provisions of the preamble of the constitution. So help you God!
2018-07-16 20:37, By: sm69, IP: []

L7: Do Reinvested Dividends Bust a SEPP plan?
I don’t believe this is the forum for political discussions.
There are many tax laws, and other laws, that many of us will agree with, and others that we will disagree with among ourselves, as well as with those who established the respective laws.
2018-07-16 22:05, By: dlzallestaxes, IP: []