Multiple Withdrawal Classifications

L1: Multiple Withdrawal ClassificationsA 52 year old seperates from service with a 401(k) balance. The 401(k) has an outstanding loan balance and some highly appreciated stock in it. He rolls over the 401(k), which defaults the loan,but before he rolls over hedoes an NUA withdrawal from the 401(k) which removes the highly appreciated stock.
After both transactions are complete and the assets are now held in an IRA, can he begn 72(t) distributions from the IRA in the same year as the other two transaction were completed?
Thanks

2007-07-13 13:10, By: Marc, IP: [75.39.50.65]

L2: Multiple Withdrawal ClassificationsWhy would he want to make SEPP 72-T distributions from his IRA ? Assuming that he had a significant amount of NUA stock, the COST of all of that stock was included in his taxable income, at ordinary tax rates. When he sells any of the NUA stock, he pays tax on the APPRECIATION of the shares sold, at 15% long-term capital gains tax rates without having to wait 1 year. If he wants to defer selling any of the stock until the following year because he might be in the 15% ordinary income tax bracket, then the capital gains tax rate would be 5%. In that case, he should convert his regular brokerage account to a margin account, and borrow funds. The margin interest is deductible as “investment interest” up to the amount of total investment income (interest and dividends). I did all of these with a client who had $ 800,000 in NUA from Merck, and saved him over $ 100,000 in income taxes !!!! Besides, the taxpayer is probably in 25-35% income tax bracket from his salary, severance pay, vacation pay, etc., and should consider deferring additional taxable income to next year by these techniques.2007-07-13 14:00, By: dlzallestaxes, IP: [151.197.92.251]

L2: Multiple Withdrawal ClassificationsThe margin idea is very good and would definately be a preferred approach for a lot of early retirees. This individual however has completely “blown himself up”. He owes everyone and their brother (including the IRS).
Luckily, he already has a new, and decent, job but needs more than the NUA ($55K with $20K basis) just to pay back taxes and the tax onthe 401(k) loan default. Believe me, I really struggled with the SESS, because of this question, but I need every penny of liquidity right now just to get back to even.
I”m hoping that with some oversight (he wasn”t working with anyone before) his new job and the SESS that we can actually adjust to this higher income level and continue accumulating over the next 8 years. I thought about pushing the SESS out to 08, but I”m afraid he would just have a mountain of credit card debt by that time.
Fun…eh.

2007-07-14 06:14, By: Marc, IP: [216.176.155.134]

L2: Multiple Withdrawal ClassificationsHis spending and debt really tighten the shackles here. A 72t usually gets busted one way or another with a taxpayer with this kind of profile, but there may be no other choice of funds. How about an IRS installment agreement, anything that can prevent additional taxable income in 2007.
Finally, note that if the IRS levies his IRA for back taxes, it would bust his 72t, even though a levy itself is a penalty exception. The retroactive penalty and interest are still due though as the 72t would be busted. You have a real challenge here.2007-07-14 13:04, By: Alan S., IP: [24.116.66.98]

L2: Multiple Withdrawal ClassificationsMarc:
After reading your original and follow-up post, I”m confused. In the follow-up post you use the initials “SESS” which I can”t translate from everything else you have said. Per chance do you mean “SEPP” for Substantially Equal Periodic Payments? This may be a really minor item but please clarify.
The really big item that”s bothering me is the procedure for removing the NUA stock from the K-plan. If I”m following your description correctly,the NUA stock was removed from the 401(k) and then the balance was rolled over to an IRA, and that nowboth the NUA stock and the other assets are in oneIRA. Is this correct?
Here”s my understanding of the process for removing NUA stock from a K-plan. Step one:Transfer all K-plan assets EXCEPT the NUA stock to an IRA Rollover account. Step two: After all assets have been removed from the K-plan, transfer all NUA stock shares to an individually titled,non-qualified brokerage account for the former K-plan holder. Now you have all assets separated into two accounts; anon-qualified brokerage account for the NUA stock and a Rollover IRA for all other assets, and never the two to mix again.
It sounds like this person did it backwards and has created another problem to go along with what seems like a basic nightmare.
DLZ, Alan, Bill … what say you?
Jim2007-07-16 15:44, By: Jim, IP: [24.252.195.14]

L2: Multiple Withdrawal ClassificationsJim,
I assumed by SESS, he meant SEPP from the context, but maybe not. If not, he should explain what he means.
With respect to the NUA, it does not matter whether the NUA shares or the IRA transfer is done first as long as both are done in the same calendar year as required for a qualified LSD. The LSD. In his case, there must also be no intervening distribution years between his separation from service year and the LSD year. As you indicated, and the initial post does not clarify, it is possible that the NUA shares ended up in an IRA. If that happened, the use of NUA is permanently forfeited, even if he were roll the IRA back into another employer plan. Another possibility would be selling the NUA shares and then rolling the cash over to an IRA. That would not fly either, as the remaining cash would not be rollover eligible. Therefore, we can”t be sure exactly what we have here.
If the NUA shares were kept and sold in the taxable account, as dlz suggested, the proceeds could be used to keep the taxes down for the current year, and defer the start of the 72t to next year or beyond when he would have much less taxable income.

2007-07-16 16:51, By: Alan S., IP: [24.116.66.98]

L2: Multiple Withdrawal ClassificationsSorry, the SESS refers to the SEPP or 72(t) distributions.
The NUA stock was certificated into individual registration and removed from the 401(k) plan prior to the rollover transaction.
In order to complete an NUA the plan document required the remainder of the 401(k) plan to be rolloved over, which it was. The balance, net the NUA, is now in an IRA.
In reading your responses I am not familiar with the LSD acronym.

Thanks for your help, isn”t this fun.

2007-07-17 12:37, By: Marc, IP: [75.39.50.65]

L2: Multiple Withdrawal ClassificationsLSD = “LUMP SUM DISTRIBUTION” which means 100% of the retirement account has been distributed by 12/31 of a calendar year, and nothing is left that is distributed in the following calendar year. As easy as this sounds, interest and dividend payments may get posted to the account 1 to 60 days after the “record date” which can often be in the next year, even though the investments themselves were all transferred before 12/31. I don”t know if this has ever been an issue with IRS to deny LSD qualification.2007-07-17 12:58, By: dlzallestaxes, IP: [141.152.255.66]