New SEPP or exempt

L1: New SEPP or exempt
72(t)(2)(A)(v) question re: to set up a SEPP or exempt from early distribution.

DOB 2/15/57 My wife is receiving a lump sum distribution on 3/1/2012 (she will be 55 on 2/15/2012). She is retired and wants to take early distributions from the rollover IRA that will be created with this money. Does she need to set up a SEPP to receive
money from this IRA before she is 59 1/2 or is she exempt under the section mentioned above……ie can she take a distribution the same as if she were 59 1/2 without the SEPP? Distribution would begin in April 2012.
Great site……..thx for the help
Daringdoc
2011-11-05 18:34, By: daringdoc, IP: [71.93.40.224]

L2: New SEPP or exempt
If she takes a lump sum and transfers to an IRA, the IRA rules and penalties apply and any distributions prior to age 59.5 would be subject to the 10% penalty unless she creates a SEPP plan.
72(t)(2)(A)(v) applies only if she is age 55 at separation and the funds are distributed from an employer plan.
If the funds are comming from a 401(k), find out from the Plan Administrator if they will make periodic distributions directly from the 401(k) plan – if yes, then there would be no need for a SEPP and there would be no 10% penalty.

2011-11-05 18:44, By: Gfw, IP: [205.178.73.77]

L3: New SEPP or exempt
It is not completely clear when her actual separation will occur or has occurred. The age 55 exception for distributions directly from the plan could only apply if her separation takes place in 2012 or later. If she retired this
year, it is prior to the year she will turn 55 and the exception cannot apply. That in turn would set up the need to do the IRA rollover and start the SEPP from the IRA account.
Be sure that all plan balances including late employer matches or dividends on stock holdings are included in the balance so that there are no trailing transfers from the plan to the IRA after the SEPP is started. If there is
any doubt about this, an additional IRA can be set up to transfer the initial funds into such that any trailing distributions do not go into the new IRA, but into the original IRA.

2011-11-06 00:35, By: Alan S., IP: [24.116.66.40]

L4: New SEPP or exempt
1. What do you mean “sheIS retired” ?
2. Are there any “company shares” in her 401-K ? If so, she may be eligible for the NUA provisions for her lump sum distribution, which could save her significant taxes.
3. Is the deferral of the lump sum until after she is 55 at her request because you/she thought that she would be eligible for the 55 exclusion ? If so, she probably is not if she is already “separated from service” during 2011, but the distribution is
in 2012.
2011-11-06 14:17, By: dlzallestaxes, IP: [96.227.217.194]

L5: New SEPP or exempt
#1 & #2……..see reply to first response
#3 She will be eligible to take the benefit when she is 55 in February 2012 or she can take it later……at 55 she can take it as an annuity or a lump sum. She will take the former. The lump at 55 is per her request. If she is eligible for the 55 exclusion
she doesn’t need to bother with the SEPP for an early withdrawls, but if she is not eligible she will set up a SEPP for the early withdrawl. That is my question.
Thx
2011-11-06 16:58, By: daringdoc, IP: [71.93.40.224]

L4: New SEPP or exempt
She was layed off from the company about 1 1/2 years ago and does not plan to work any longer as I am 68. She rolled over her 401K into an IRA when she left the company. This money is a separate benefit that she can take when she she turns 55 in February
of 2012. She can take the money annuitized or as a lump sum. She will take it as a lump sum and put it into an IRA. It sounds as though she will need to withdraw money from this IRA as a SEPP if she wants some of the money before she is 59 1/2.

Thx again

2011-11-06 16:50, By: daringdoc, IP: [71.93.40.224]

L5: New SEPP or exempt
Trying to tie together loose ends here.
Since your wife separated from service prior to the year she reached 55, if she wants to withdraw funds from the original IRA OR the new IRA funded by a rollover of the lump sum, she will need to start a SEPP.
She could combine the IRAs into one account or she could partition the IRAs such that the balance in the IRA used for the SEPP reflected the amount she needs distributed each year. The other IRA not being used for the SEPP can be used for emergency needs
subject to the penalty until she reaches 59.5.
Even if she elected to take the annuity rather than the lump sum, since this appears to be a qualified plan, the annuity payments would be subject to penalty until age 59.5. She separation from service exception does not apply to her since she left prior
to the year she reached 55.

2011-11-07 01:38, By: Alan S., IP: [24.116.66.40]