Pension and 401k rollover

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L1: Pension and 401k rolloverIhad someone ask me to look at their 2007 return which was already filed. To make a long story short, he retired from his company at age 56 and had a pension and a 401(k) with about $500,000 in them. His plan was to use $150,000 to pay down some debt and use the remaining $350k for retirement income. Under section 72(t) he could withdraw the $150k and not be penalizes because he was over 55 and separated from service. The problem is his fin”l advisor had him do a direct rollover into an IRA. About 2 weeks later he withdrew the 150k thinking there would be no penalty. Under sec 72(t) IRA distributions do not qualify for an exeption to the penalty. Is there anything I am missing? Is there any work around that anyone is aware of? I think the financial advisor could be liable, but that is another issue. Any help would be appreciated. -Mike- 2008-05-17 05:11, By: tmike, IP: [12.202.214.28]
L2: Pension and 401k rolloverHello, Mike:
If he had left the money in a 401k or other qualified retirement plan and the company allowed partial distributions from its plan(s), then he could have taken the $150k distribution penalty free. He would have had to pay a substantial tax bill, however, as his income for the year in which that $150k came out of the tax shelter would likely have been substantially higher than his typical income. Being age 55 or more and separated from service allows this but does not mandate it. It is up to the company plan to determine whether this is allowed. The plan SPD or Summary Plan Document will describe this in considerable detail.
Now that the money is in an IRA, however, the $150k penalty-free distribution is not allowed until age 59.5. He could set up and take 72t payments on the whole $500k but that would likely result inincome of $25-30k per year and not anywhere near $150k. There are calculators on this web site that can calculate the 72t payment amount. Pulling $150k from the IRA prior to the start of a 72t plan is allowed but also penalized with pre-age 59.510% early withdrawal tax as well as regular income tax. A 72t plan could then be set up on the remaining $350k balance, although the income from that would beabout 1/3less than it would have been on the $500k balance.
Maybe it”s just me but it seems a very poor retirement plan to take nearly 1/3 of one”s retirement stash and use it to pay bills. I don”t know anyone planning to retire in their mid-50s with only $350k available to them for retirement income. Retirement is an expensive proposition and it is quickly getting more expensive all the time. Most folks will need all of the money they can get their hands on to fund a decent life. Most people contemplating early retirement will have between $1-1.5 million socked away for it and not 1/3 to 1/2 of that.
Ed2008-05-17 08:17, By: Ed_B, IP: [67.170.159.37]

L2: Pension and 401k rolloverThanks for the help Ed. My problem is that he came to me after the fact. He has already taken the 150k as a distribution during ”07. I was brought in the picture to review what was done. He was advised by the plan administrator that he in fact could withdraw the money without penalty because he was over age 55 when he separated from service. His personal financial advisor had him do a rollover into an IRA and then withdrew the 150k. The withdrawl of the 150 occured just 2 weeks after the rollover. This resulted in the penalty.
Due to certain circumstances, hedecided to do this. Wife had just died, he was strapped with a lot of debt and the company was letting him go due to cutbacks. He understood that federal and state taxes would be due but not the $15000 for premature distribution. My question is whether or not there is any way around this. I believe his financial advisor gave him some very bad advice by rolling the entire amount over. I cannot come up with a fix and am just wondering if there is anything I am missing. Thanks again. -Mike-2008-05-17 10:31, By: tmike, IP: [12.202.214.28]

L2: Pension and 401k rolloverMike,I agree with Ed”s comments. Unfortuneately, the only recourse available at this point is to take legal action against the so called advisor. While the IRS has extended the 60 day rollover deadlines in many cases, one situation in which they will not is when the taxpayer actually uses the distributions for expenses. I assume he used most of the distributions to pay down that debt. Frankly, if he has a substantial amount left, he might consider requesting relief on the portion he did not spend, but even to to that he would have to roll the amount back right away and then request the ruling using the combination of his job loss and wife”s death to justify making a poorly thought out distribution.
Even if after considering bankruptcy if he is in a state that protects IRAs or has not opted out of the federal bankruptcy protection provisions, it is possible that the penalty is still preferable to default on the debt. What is disturbing here is taking the 150,000 distribution at one time and possible also in the same year that he still had salary income which would drive him into higher brackets. Those higher brackets are more punishing to him than the early withdrawal penalty. It is sad to see this happen to people, much less those people who have actually retained an advisor to avoid pitfalls like this. If he actually acted on his advisor”s recommendations, I would recommend aggressively pursuing reimbursement for the penalty as an absolute minimum.2008-05-17 17:32, By: Alan S., IP: [24.116.165.60]

L2: Pension and 401k rolloverTMike:
No problem on the advice. This web site is a great place to ask questions. There are a lot of folks here who know their stuff about financial matters and who are happy to share their experience and knowledge. I try to pay some of that back now and then by contributing when I can.I understand that you are coming into this after the fact. It is clear that this fellow is now in a terrible financial and personal situation.I am agast that a so-called professional does not know that the rules that govern company retirement plans and IRAs are substantially different. I know this and would not consider myself to be any kind of “pro” in such matters, although I have studied these issues.At this point, I agree that there isn”t much that can be done to remedy the situation. It”s bad and is likely to get worse if it is not handled diligently from here on. A good tax attorney and a good CPA might be well worth consulting. It may be that there is nothing that can be done to improve thissituation but it would be good to know that or perhaps even find any remedy that remains open to him.I agree with Alan that, if his financial advisor really did give him this advice, he should pursue legal action to recover any costs or penalties that he can. This is not something to be done lightly but it is sometimes necessary and proper.

Ed2008-05-17 21:31, By: Ed_B, IP: [67.170.159.37]

L2: Pension and 401k rolloverBefore instituting legal action, the client, you, or an attorney should contact, IN WRITING,the branch manager or president of the company that the “financial advisor” works for. Explain the situation, and ask for a written response as to what the company will do.
If nothing, or if he was an “independent advisor”, rather than working for a company, then contact the state Attorney General, SEC, and any and all other agencies that might have oversight to this activity.
In most cases he should have “professional liability insurance” which should cover his negligence, but he might have been negligent there also, and not have any coverage.
Also, contact whomever his accredidation is from.
And your client should demand a refund of any fees he paid this “advisor”.2008-05-18 16:27, By: dlzallestaxes, IP: [151.197.40.110]

L2: Pension and 401k rolloverThanks again for all the help. It is greatly appreciated. -Mike-2008-05-18 17:25, By: tmike, IP: [12.202.214.28]

L2: Pension and 401k rolloverGood morning Mike:
So we can get a clearer picture of your delima, please clarify your position in this mess. What hats do you wear? Are you a tax preparer (EA or CPA or just a preparer), Registered Rep, Insurance Agent, Independent RIA, or just what? Telling us this will help us structure our responses more correctly.
Thanks.
Jim2008-05-19 08:14, By: Jim, IP: [70.167.81.119]

L2: Pension and 401k rolloverI am a tax preparer and have been in the business since 1977. This person was a referral that came to me to get a “second opinion” on how his return had been prepared. -Mike-2008-05-20 10:41, By: tmike, IP: [12.202.214.28]

L2: Pension and 401k rolloverWell Mike, based on your 31 years of experience preparing taxes and the other comments to your question, I will assume that your “second opinion” is something along the lines of, “The tax return is prepared correctly.” Then your second sentence is,”The problem is the advice received to process the IRA Rollover, thus losing the option for withdrawals from the company plan without penalty.”
I would suggest that your client seek financial relief from the financial advisor and his company, which is probably an insurance company or Broker / Dealer.Jim2008-05-20 11:20, By: Jim, IP: [70.167.81.119]

L2: Pension and 401k rolloverThanks Jim,That was exactly my thoughts. I just wanted to make sure that there wasn”t something I was missing in the way of a possible remedy. I am not a 72(t) expert so I value the opinion of the people on this forum. -Mike-2008-05-20 14:19, By: tmike, IP: [12.202.214.28]