Over 55 exception

L1: Over 55 exceptionQuestion Re: Over 55 exception.
Husband thinking about early retirement (age 57). Willrollover Lump Sum Pension Distribution to an IRA.
Understands he can take distributions from 401K after terminating service w/o 10% penalty since he is over 55. However, he would like to move the 401K to outside brokerage for better investment options. Is there are way to do this without setting up a SEPP which would obligate him to withdrawal for next 5 years?
meb242006-07-28 08:36, By: meb24, IP: [71.230.92.4]

L2: Over 55 exceptionHello meb:
Once assets are moved from hubby”s 401(k) to any IRA account; the age 55 exception to the surtax is lost irrevocably. That being said, this simply takes some planning. I would first inquire of the 401(k) plan administrator to determine if the plan permits/supports periodic distributions; if so, then simply leave enough assets in the 401(k) plan to support your needed distributions for the next 2 1/2 years or so until hubby attains age 59 1/2, moving the excess assets from the 401(k) plan to an IRA. If the plan does not support periodic distributions then you need consider taking two lumps sums now: (1) one lump sum which is sufficient cash to support yourselves for 2 1/2 years and(2) the balance to an IRA. This is not as nice as periodic distributions as it tends to cause a bubble in taxable income in the year of distribution but it still accomplishes yourgoal.Last on my list would be a SEPP plan given that your husband is already 57; or blend it with some of the options above; e.g. start a SEPP plan against a newly created IRA for some modest portion of your annual living expenses that you know will postively continue into your 60”s.
TheBadger
wjstecker@wispertel.net
2006-07-28 09:01, By: TheBadger, IP: [66.109.211.254]

L2: Over 55 exceptionAnother possibility that could be integrated into theBadger”s suggestions would be NUA. This would be viable if he has highly appreciated employer stock in the 401k, by that I mean shares with a cost basis of less than 40% or so of what the current value is. The administrator can quote him the cost basis per share.
The shares, or some of them, would go into a taxable brokerage account and could be sold at the LT cap gain rate. The downside of this is that the cost basis is taxable in the year that the required lump sum distribution is made, and diversification could be a problem if he already has too much in these shares. To the extent that the cost basis is far less, perhaps even around 10%, this option becomes much more attractive. Because he has separated after 55, there is no 10% on the cost basis part of the tax. This would not work with partial withdrawals extending into a second calendar yearsince a lump sum distribution is required in a single year, but could be integrated into other portions of the suggestions theBadger made. Due to the added complexity, perhaps he may wish not to use NUA unless the cost basis is really compelling.
2006-07-28 17:29, By: Alan S., IP: [24.116.165.157]

L2: Over 55 exceptionTo clarify, or expand upon, Alan”s excellent comments, you cannot roll over your entire 401-k to an IRA, and then utilize the special NUA provisions. You must take a distribution, IN KIND (i.e. of the employer”s shares of stock), and deposit/transfer these shares directly into a regular account at a broker (or for some reason take possession of the actual stock certificates, which I never recommend).
Then, you usually are sold out of your remaining positions in your 401-k, and the cash is transferred electronically, directly to your IRA account. (Sometimes you can transfer the actual mutual funds, so long as your employer”s administrator will transfer them, and your IRA custodian will accept them. But sometimes not all of the funds are “transferable”.)
Once you transfer the employer”s shares to your regular account at the broker, you do not have to sell any shares in order to get cash, especially if you already have significant wages this year. I arrange for clients to set up the account at the broker as a “margin account” so that you can get cash by borrowing against these employer shares for the rest of the calendar year, and then start selling them next year to repay the “margin loan” and get cash flow, especially if you can keep yourself in the 15% tax bracket (where capital gains are taxed at 5% !!!!!). You should also check the inter-relationship with the calculation of taxable social security. It often pays to delay taking SS benefits until full retirement age so you can stay in the 15%/5% tax bracket. In some circumstances it even works out to consider delaying SS benefits until 70 1/2, but not often. These decisions can become complex, and take a sharp pencil/computer/advisor to figure out the best approach.2006-07-29 00:35, By: dlztaxes, IP: [4.175.9.32]

L2: Over 55 exceptionQuestion:
separated from employment year of turning 55. leave funds in employer”s 401K. able to take distributions 2 years later without 10% penalty or SEPP?

2006-07-30 11:01, By: squeaky, IP: [71.129.85.129]

L2: Over 55 exceptionsqueaky … if you seperatedyour service anytime in the year that you attained age 55 the 10% penalty would not apply to distributions taken from the 401(k) plan.2006-07-30 12:16, By: Gfw, IP: [172.16.1.72]

L2: Over 55 exceptionIRS CODE SECTION 72(t)(2)(A)(v) only states that an exception to 10% Early Withdrawal Penalty before age 59 1/2 is a “distribution made to an employee who has attained age 55 and separated from service (not applicable to IRAs)”.
It is not logical that this would mean that you can use this provision only if you are separated from service only after you become 55, but not in any year after that when you are separated from service. Also, once you are 55 and separated from service, it is likewise illogical that you must take your distribution before you become 56.
But who says the tax laws or IRS are ever logical????
I”ve never seen this situation challenged — taking distributions between 55 and 59 1/2 after separation from service. And I think the distributions can be taken during multiple calendar years, not all in one year. Otherwise the “lump sum” distribution might throw someone into a higher tax bracket, thereby offsetting the exception to the 10% penalty.2006-07-30 15:51, By: dlztaxes, IP: [4.175.9.205]

L2: Over 55 exceptionIbelieve that PLR 8837011 removed any doubt about the exception applying to later year distributions.
It has also been established that age 55 is considered “attained” as long as the separation occurs in the calendar year the employee turns 55, meaning that many qualify shortly after turning 54 if their birthday is late in the year.
Most of the tax court activity centers around the definition of “separation”, given the fact that many change their employment status from employee to independent contractor consultant etc., and companies restructure in so many different ways.

2006-07-30 19:06, By: Alan S., IP: [24.116.165.157]

L2: Over 55 exceptionAnother question regarding original post and TheBadger”s response:
After terminating employment (age 57) and rolling over a portion of 401K to an IRA, can he then make 2 annual withdrawals (one @ age 58 & one @ age59) to deplete the remainder of the 401K (and not have to pay the 10% penalty) or does he have to takethe non-rollover amount (remainder of 401K) in one lump sum?He would like to take 1/2 the balance each year in order to stay in a lower tax bracket.
meb242006-07-30 20:31, By: meb24, IP: [71.230.92.4]

L2: Over 55 exceptionYes, any distributions from the remaining 401k account are free of penalty. The only concern is whether the plan administrator will allow partial distributions to continue or require a lump sum distribution. If allowed, taking an equal amount out each year will probably keep you in a lower tax bracket.2006-07-30 21:52, By: Alan S., IP: [24.116.165.157]