Non IRA Qualified Plan and Aggregate Balance
L1: Non IRA Qualified Plan and Aggregate BalanceI will be 53 and retiring in 2017. I have existing IRAs and a 401(k). In addition, I have an ESOP account with the company that I am leaving. The ESOP account has a substantial amount in it. Payout of this account when I leave the company will take place in annual distributions over 10 years, which would be rolled into an IRA. For the interest of calculating a 72(t) SEPP, can I take the beginning account balance of the ESOP (classified as a 401(a), and is valued annually), plus the IRA balance? Then roll the first annual ESOP distribution into the existing IRA, set up a 72(t) SEPP for distributions from that IRA. I am thinking that I need to setup a separate IRA for subsequent annual distributions from the ESOP, and not take any distributions from it.
I have been unable to find any guidance on non-IRA qualified plans, and how you can aggregate the balances. Thoughts?2016-12-17 17:20, By: NotSoOld, IP: [22.214.171.124]
L2: Non IRA Qualified Plan and Aggregate BalanceFirst, the 10 year payout will eliminate the possibility of NUA because you cannot do a qualified LSD until the final year. Your postedplan is about the only option for penalty free distributions since you will not qualify for the age 55 separation exception.
Therefore, if you did a direct rollover of the non ESOP 401k balance plus the first ESOP installment to a rollover IRA and then do a non reportable transfer to a new IRA combining any other IRA balance you already have into that IRA, you could start a 72t plan from that IRA. Leave the first rollover IRA account open to receive the future ESOP direct rollovers as that account will not be part of your 72t plan. This also avoids having a later ESOP installment accidentally being rolled into your 72t plan IRA and busting the plan. This is a similar setup as you mentioned except that it eliminates the chance of the accidental rollover into your 72t account.
As for cobbling together the 401k and ESOP and trying to manage a 72t plan directly from both these plans combined balance, best to forget that. You would have too many variables and no control. Even a 401k plan 72t is very risky by itself much less combining the two. It is also not real clear whether they can evenbe combined in the eyes of the IRS since they are different plan types.2016-12-17 19:23, By: Alan S, IP: [126.96.36.199]
L3: Non IRA Qualified Plan and Aggregate BalanceWe know that IRA and 401-K accounts cannot be combined for Required Minimum Distribution purposes at 70 1/2. I agree with Alan that there could be issues with IRS if you tried to combine them for SEPP 72-T purposes or calculations. I think it would be much safer to try to get by without a 401-K SEPP 72-T because it is not too common, and the IRS probably is not familiar with how to handle them.2016-12-17 19:58, By: dlzallestaxes, IP: [188.8.131.52]
L4: Non IRA Qualified Plan and Aggregate Balancedlz – actually, I had misread the OP’s post about combining the IRA and 401k which is clearly not allowed, as combining the ESOP with the 401k. I thought he was thinking about combining those two planswithout rolling to an IRA, using the combined balance for a single72t plan, receiving the 10% ESOP distribution as a part of the 72t distributionrequirement and taking the rest from the basic 401k plan. For that math to work the 401k would have to benearly twice as largeas the ESOP balance. This arrangement is what I referred to aslacking any IRS guidance on whether it would be allowable or not. While both are DC plans of a single employer, they do differ in other ways and it is not clear whether the IRS would pass this arrangement or not. But I wouldn’t want to be the first to test it.2016-12-17 21:28, By: Alan S, IP: [184.108.40.206]
L5: Non IRA Qualified Plan and Aggregate BalanceFrom a planning standpoint, I would try to convince a client to work a little longer, if possible, until he reaches January of the year in which he would become 55. That approach would eliminate the need for a SEPP 72-T, eliminate getting locked into a fixed amount until 59 1/2, eliminate the 10% early distribution penalty, and provide complete flexibility of taking what he wants when he wants from the 401-K, while leaving the IRA intact until 59 1/2.
If he has significant appreciation in employer stock in his 401-K, this would also allow him to utilize the NUA special tax provisions. With all of the positive aspects of such a plan, must clients would figure out a way to continue working for another 1-2 years. If he had to go to a different company, and found one that would accept a transfer of his 401-K plan and partial distributions after 55, it could be a very valid approach to consider if he had to leave his current company, although he might not qualify for the NUA provisions.
I suggest that he meet with a very good tax or financial planning practitioner to lay out the effects of the various scenarios before he finalizes his plans.2016-12-17 22:00, By: dlzallestaxes, IP: [220.127.116.11]
L6: Non IRA Qualified Plan and Aggregate BalanceThank you for your feedback. Regarding the 401k, it is not tied to company stock, and I plan on rolling it into the existing IRA as a first step. I like the idea of rolling the first ESOP distribution into the existing IRA, and then rolling an appropriate amount from the existing IRA into a new IRA for 72t distributions. Much safer. My main concern is knowing for sure that I can use the FULL ESOP account balance, plus the balance in the existing IRA for my 72t calculations.
I also plan on working with a financial planner. The first one backed away from helping with a 72t. A CPA tax person I tried was unable to help. Still looking…..
In addition, I do have a Roth IRA with significant conversion and contribution value, which I could also tap into. My spouse is planning on working a few more years, and will be retiring closer to age 55. So I have some options to play with. 2016-12-18 01:44, By: NotSoOld, IP: [18.104.22.168]
L7: Non IRA Qualified Plan and Aggregate BalanceI think all the possibilities posted has resulted in some confusion.
Actually, you cannot use the full ESOP balance with your IRA balance in a single 72t plan. These are definitely two entirely different types of plans. Your IRA balance used to calculate the 72t must be a reasonable representation of the value on the date of your first distribution. Since you can only roll 10% of the ESOP into the IRA per year, you could do the first rollover and then use the IRA balance to calculate the plan. Of course, if you wanted to wait until the second installment was available you could also do that and calculate and start your plan right after the second rollover. What you cannot do is use any of the ESOP value that is still in the ESOP (not in the IRA) to calculate your 72t distribution.
The 10% installment ESOP payout is also what eliminates doing a lump sum distribution if you wanted to use NUA for the ESOP since the LSD cannot be done until the year you are eligible to receive the final installment. By that time your 72t plan would already be completed.2016-12-18 02:16, By: Alan S, IP: [22.214.171.124]