Lump Sums and After Tax 401k Contributions

L1: Lump Sums and After Tax 401k ContributionsI have a follow up question to a post two weeks back concerning my wife”s plan to retire this year.
1. My wife plans to possibly take a LS vs. Annuity. In calculating a LS, if the interest rate is low, does this typically make the LS greater?
2.Fidelity handlesmy wife”s 401k Plan. In talking with a representative this morning, they told her she had $41k in after tax contributions. They went on to say she could take that money as a lump sum at retirement w/o incurring the 10% penalty. I am not sure this s true.
Your thoughts areappreciated.
2008-01-22 11:01, By: RetiredGene, IP: [71.52.113.218]

L2: Lump Sums and After Tax 401k ContributionsGood afternoon Gene:
Typically the lower the interest rate the higher the amounton a pension plan, lump sum distribution. Check with her HR Dept for the interest rate they will use. From what I have seen, this interest rate is usually set in one year for distributions in the following year. It isn”t a changing amount from one day to the next.
Fidelity is telling you the correct information. When you rollover your K-plan to an IRA, you will have the option to either take a distribution in cash (check) for the after-tax amount, or you may include it in the amount rolled over to the IRA. I have yet to see a good, logical reason to include after-tax funds with pre-tax funds, so TAKE THE CASH! It is not subject to the 10% penalty and there is no additional tax due on this amount. Use the money to live on until you can start taking penalty-free withdrawals from the IRA, if she is close to age 59 1/2. If she has to start a SEPP Plan in the near future, having the after-tax funds in the plan will only make tax preparation to account for the non-taxable distributions one more item of aggravation.
Jim2008-01-22 11:18, By: Jim, IP: [24.252.195.14]

L2: Lump Sums and After Tax 401k ContributionsI generally agree, but here is some more to consider:
Due to the new option of direct Roth conversions from 401k plans available this year, it may be worth waiting until the IRS Regs are released on these transfers. The 100,000 AGI limit still applies to these “conversions” until 2010, but if your combined MAGI will be under this figure for 2008 AND if the $41k of after tax contributions constitutes a significant % of her total balance, the potential to convert some or all of the balance could be meaningful. If she also has any pre 1987 after tax contributions, it gets even better because these can be distributed separately from pre tax amounts if the plan separately accounts for them. So you need more information:
A) Lump Sum Options
1) Any NUA potential from employer stock, any pre 1987 after tax contributions and what % of the total is the $41,000? The plan administrator should be able to provide any data this is not evident from plan statements.
2) How can the new direct Roth conversion be leveraged given the above breakdown?
3) Exactly how is the lump sum determined, ie what is the interest rate formula and how often does it change? For example, if you know how this works, you can time the lump sum to her advantage. Changes dictated by the Pension Protection Act are causing the phase in of higher rates (lower lump sums) over time, although this trend may be mitigated temporarily be falling interest rates. Note today”s Fed action and next week”s.
B) Annuity
Once you get the various lump sum options summarized, do not fail to at least look at the monthly annuity payment being offered and what options come with it, eg joint and survivor benefits. Will the annuity be provided by an insurance company (no PBGC insurance) or directly by the plan which would then be insured by PBGC if her pension is not a public pension. Consider the risk tolerance of both of you vrs how other assets are held and/or what you will do with a lump sum. You can consider your projected SS benefits also as life annuities for purposes of diversification of asset types.
This is not an easy decision given the complexity and that it”s a one timedecision if she takes the annuity. If she takes the lump sum and directly tranfers it to a TIRA, an immediate annuity could be purchased as an IRA annuity at any future date desired. This argues for a lump sum. Almost any financial planner will also recommend the lump sum, but then they hope to be managing it for you………….

2008-01-22 14:11, By: Alan S., IP: [24.116.165.60]

L2: Lump Sums and After Tax 401k ContributionsCheck with your HR Dept., 401-K administrator, and Fidelity to see if there is company stock in her 401-K. If so, meet with a tax specialist familiar with NUA (”NET UNREALIZED APPRECIATION”) of employer stock in company retirement plans IMMEDIATELY because you can save a lot in taxes if the shares have appreciated significantly in value since the company put the shares in. Get the “company cost” figure.
See other postings on this forum, and get J.K. Lasser “YOUR INCOME TAX 2008” (< $20)for an excellent discussion of this great tax saving loophole.2008-01-22 14:13, By: dlzallestaxes, IP: [151.197.32.109] L2: Lump Sums and After Tax 401k ContributionsQuestion for Alan S. What is the signifiance of after tax contributions prior to 1987? My wife''s plan tracks these monies. 2008-01-24 10:13, By: RetiredGene, IP: [71.52.113.218] L2: Lump Sums and After Tax 401k ContributionsGene, The significance is that the pre 1987 after tax contributions that the plan accounts for separately can be distributed separately from other assets. After 1986 these contributions can only be distributed on a pro rated basis with pre tax amounts in the plan. This provides you with some interesting options: 1) The possibility of converting this amount directly to a Roth IRA tax free once Regs are issued regarding the new Roth transfer first available this year. The Regs are not yet out, and may take a couple months to get them. 2)Or tax free distribution to you before other plan assets. The amount can be rolled over to a TIRA and a Form 8606 filed to report basis. A standard Roth conversion can then be done if you are income eligible with the taxable share based on pro rating the basis vrs. total IRA assets. The remainder of the plan balance could then be transferred to an IRA in the following year. Caveat: If you have NUA potential as mentioned by dlz, be careful not to have intervening distribution years, or you will have to wait for another triggering event in order to use NUA. A lump sum for NUA purposes must follow a triggering event with no intervening distribution years. Triggering events are separation, age 59.5, disability or death (the last one won''t help you) :)2008-01-24 20:27, By: Alan S., IP: [24.116.165.60] L2: Lump Sums and After Tax 401k ContributionsAlan S, Thanks for your reply. The game plan for my wife is as follows: 1. Retire (leave AT&T) payroll effective April 2, 2008. 2. Take pre 1987 after-tax contributions as a separate lump sum to cover her financial needs until we set her 72t distribution up to be effective July 1, 2008. 3. Rollover her pension and 401k into an IRA and use these monies to establish 72t (approx. 1.1m). She will take a full year distribution for 2008 by taking the 1st 6mos. as a lump sum and establish monthly distributions effective July 1, 2008. 4. The NUA issues do not come into play in her situation. Appreciate all your thoughts. 2008-01-25 08:51, By: RetiredGene, IP: [71.52.113.218] L2: Lump Sums and After Tax 401k ContributionsThat should work fine. Maybe good there is no NUA. Having a combination of pre 1987 and post 1986after tax, NUA LSD, IRA transfer and 72t set up all in the same year creates perhaps a few too many moving parts.2008-01-25 13:35, By: Alan S., IP: [24.116.165.60]