Partial 401K distribution + rollover to IRA for SEPP
L1: Partial 401K distribution + rollover to IRA for SEPPI am 56 (born 11/57) and retiring from my employer today 6/1/14. My 401K does not allow partial withdrawals. My current balance is $450k. My k plan will allow a portion to be distributed directly to me and the rest rolled to an IRA (Vanguard). I would like to take $25k immediately to pay off some debts and roll the rest into an IRA to set up a SEPP starting in August 2014 to supplement my pension. Would this plan work without triggering a penalty? Thank you.2014-06-02 01:51, By: Norcal Mike, IP: [184.108.40.206]
L2: Partial 401K distribution + rollover to IRA for SEPPYes, it will work and there will be no penalty. If your 401k plan would have provided partial distributions, you could have avoided a 72t plan and used the age 55 separation exception from the penalty. But having to take out 3 years worth of distributions in a single yearmightinflate your tax rate more than it will save you from the penalty exception.
That said, a 72t plan using a balance of 425k will only produce an annual distribution of around 20k. Is that going to be enough to live on along with the pension, at least until SS kicks in?2014-06-02 02:53, By: Alan S, IP: [220.127.116.11]
L3: Partial 401K distribution + rollover to IRA for SEPPYou can take any amount of distribution from your 401-K without being subject to the 10% penalty now that you are separated from service. But it is taxable income in addition to your salary that you already received, plus any severance pay, vacation pay, etc. You should discuss the tax aspects of any plans with your tax accountant.
If you set up a SEPP 72-T, based upon Alan’s calculation, you could take $ 20K as the 2014 distribution, which you could use for your cash needs for the rest of 2014, plus any excess towards your debts. Then in January 2015, you could take another $ 20K to payoff the balance of your debts, but then would have no cash flow until January 2016.
You should do cash flow planning from now thru age 62 when you will be eligible for SS. You will probably need to get another job, full or part-time, to supplement your needs for the next 5 years.2014-06-02 16:27, By: dlzallestaxes, IP: [18.104.22.168]
L3: Partial 401K distribution + rollover to IRA for SEPPThank you, we came to the same conclusion re 401k vs SEPP. I have a pension of about $60k which along with the SEPP will be sufficient. Once SS eligible at 62, we have more options. I would like to have no debt, all auto and home maintenance done and a regular monthly income until then, so my desire is to pay for it now using a combination of a small portion of the 401k and a portion of the 1st year SEPP. Also considering a small separateIRA for an emergency fund to avoid breaking the SEPP if needed. Of course, getting another job is an option as well, once I’ve enjoyed some time off. Thanks again for your advice and answers.2014-06-02 18:48, By: NorCal Mike, IP: [22.214.171.124]