Late Transfer from 401k to IRA that Already has 72T Started
L1: Late Transfer from 401k to IRA that Already has 72T StartedDOB 10/5/641st Distribution: Nov 15, 2017New SEPP Plan
In AugustI transferred my 401k to an IRA at Fidelity. I know that once you start a 72T you cannot make any contributions or take distributions other than for the 72T SEPP. There are exceptions that are unique (death, medical hardship, etc…) that many of you have explained in this forum. Also, any dividends earned within the IRA do not impact the 72T. It’s the “external” money transfers that can cause a “bust”.
Recently, I was concerned about dividends that were paid to my 401k (in September) and then subsequently transferred into my IRA several weeks after I had moved all of my funds over to the IRA. According to Fidelity, these were dividends from stocks that I had held in my 401k that had announced their dividend prior to my 401k to IRA transfer but were paid out after the 401k to IRA transfer. Since I had not started my 72T distributions yet, I was not worried about a “bust” but I asked Fidelity about this anyway. They indicated that even if I had started my 72T distributions, these transfers of dividend payments from my 401k to my IRA would not have “busted” my 72T if the distributions had already been started. Do you agree with their assessment?
Second (similar) issue. I have a stock purchased several years ago as part of my 401K. It is valued at $0 but is tied up in a lawsuit so I don’t want to just drop the stock. It may still have value later on, pending outcome of the lawsuit. Fidelity has transferred this stock, with $0 value, to my IRA but, I’d like to pose a question regarding this stock. If for some reason another transfer is made (in the future after I start my 72T distributions) from my 401k to my IRA due to this stock settlement, would it be a “bust” of my 72T?
I am anticipating that since the stock is now listed in my IRA, a 401K to IRA “transfer” would not likley occur but what if it did?
Thanks for your help,2017-10-12 00:57, By: Tanko, IP: [220.127.116.11]
L2: Late Transfer from 401k to IRA that Already has 72T StartedYou should have this “worthless stock” from the 401-K to a separate IRA, or to a ROTH IRA.
The “partial transfer” or “1 transfer per 365 day rule” might cause a problem. You might want to wait for more than the 365 days, and then transfer it, hoping that it doesn’t become worth a lot.
Worst case is that it will result in a large increase in your SEPP 72-T IRA account, in which case it will be taxed at Ordinary tax rates rather than capital gains special 15% or 20% rates.
If it looks like a settlement is in the offing before the 365 days, consider distributing the shares “in kind” before it appreciates, so the “bonanza” can be taxed if it grows after the distribution.
If you don’t mind, distribute it now when it has -0- value as part of your annual distribution.2017-10-12 04:20, By: dlzallestaxes, IP: [18.104.22.168]
L3: Late Transfer from 401k to IRA that Already has 72T StartedWith respect to the first issue, the following is copied from a treatise by Bill Stecker on “trailer money”:
TRAILER MONEYTrailer money can become a problem with an extant SEPP plan if not properly handled. However, 1st let’s define the sequence of events that cause trailer money to appear:(1) Taxpayer separates from service from employer (let’s say in September).(2) Taxpayer requests a qualifying lump sum distribution from his 401(k) plan and receives funds in November; or the plan administrator simply sends all of the money directly to the taxpayer’s rollover IRA account.(3) Taxpayer values the rollover IRA account as of December 31st and launches a SEPP plan effective January 1st; commencing monthly distributions of some amount.(4) In Mid-May, taxpayer gets a letter from the plan administrator with a check attached in the amount of $1,256.78 with little or no explanation of why this check is being issued; just that it is additional funds due the plan participant.$1,256.78 is a non-diminimus amount; e.g. it is sufficiently significant that the taxpayer has to do something; however, what to do is unclear: Is it principal or earnings? Into what account should it be deposited? Does it affect the 12/31/xx SEPP account valuation? Is the SEPP plan now screwed up? All of these a valid questions. Unfortunately, there are absolutely no rules or regulations on this subject. Essentially, trailer money was never anticipated by the Internal Revenue Code or the Internal Revenue Service. Thus, all we can do is look to other, typically unrelated, Code sections plus a heavy measure of common sense to figure out a set of reasonable rules.In this regard, the author would suggest that two issues are important: knowledge and transaction character. Both of these issues can provide guidance. For example:John requested a qualifying lump sum distribution (meaning 100%) of his 401(k) account & accordingly, the plan administrator sent a check for $1,504,238.66 directly to John’s rollover IRA account in November. John values the account at 12/31/xx and launches a SEPP plan with monthly distributions commencing in January. In May, John’s rollover IRA account gets an additional deposit in the amount of $1,256.78:(A) The deposit comes with no explanation. John has no prior knowledge and has no information as to the transaction’s character. As a result, John should simply treat the funds as additional earnings further treating those earnings as earned in the current year; therefore no need to restate the 12/31/xx balance on which the SEPP distributions were based.(B) The deposit comes with any of several explanations: (1) prior year earnings; (2) as a result of other employee forfeitures; (3) his apportionment from a lawsuit settlement; (4) refund of excess fees charged by a mutual fund. Each of these cases is possible, plus a dozen more. In all cases, John had no knowledge but does now have detailed information as to the transaction’s character. Similar to (3)(A) above, simply treat the additional deposit as current year earnings.
Numerous additional examples are always possible; however, hopefully the reader gets a theoretical outline: look at what you knew at the beginning of the transaction stream and further look at the character of the trailer money to the extent determinable. As a general rule, but it is only a general rule, trailer money is almost always less than 1% of the amount originally distributed. If you receive a following distribution that exceeds 1% of the amount originally distributed, it is likely not trailer money and requires immediate attention.2017-10-12 17:51, By: Alan S, IP: [22.214.171.124]
L4: Late Transfer from 401k to IRA that Already has 72T StartedFortunately, in my case, it the settlement of the lawsuit would be < 1% of the IRA which implies it would be Trailer Money and I assume it would be deposited in the IRA, where the stock currently valued at $0 is listed in my holdings. If I were to receive an "unexpected" check or monetary trailer money transfer into my IRA, does the custodian automatically treat this as CURRENT YEAR EARNINGS or will there be some tax paperwork required to explain it on my part? This has been exremely helpful information.2017-10-12 18:23, By: Tanko, IP: [126.96.36.199] L5: Late Transfer from 401k to IRA that Already has 72T StartedOf course, if you have any say in the matter, try to get the settlement distributed to you directly rather than into the SEPP IRA account. You can then roll it into a new or different IRA account to avoid the issue, or cash it out. The custodian will not automatically treat this as trailer money and will in fact issue a 5498 reporting receipt of a rollover contribution to the IRA. That has the potential of triggering an IRS response and if that happens you will have to take this matter up with the IRS directly. Note that while the author of the posted material is an expert on SEPP plans, the article is about 13 years old and the author prefaced the paragraphs I posted by stating that there is no formal IRS Regulation or guidance on trailer payments and what he posted is his logical opinion. As such, it may not eliminate the problem, but it is all we have. These situations are fairly common since many SEPPs are established shortly after a direct rollover, and no one has been reporting that the IRS has inquired into SEPPs over trailer payments. In fact, if you talked to your custodian about this, they probably would not even know what you meant by "trailer payments".2017-10-12 23:56, By: Alan S, IP: [188.8.131.52]