Pension to IRA
L1: Pension to IRAI’m 57 years old and have a pension that will offer me a lump sum of $383,000 or an annuity payment per month. I’d like to take the lump sum but I need $30,000 per year from it for the next five years. As I see it, I’m gonna pay penalty for the first two years and then won’t be. The 72t calculator says I can’t take $30,000 per year out. Is there anything else I can do?2010-11-17 21:30, By: Craig H, IP: [126.96.36.199]
L2: Pension to IRAAt age 57, you may indeed be better off taking a distribution without a SEPP plan and paying the 10% penalty. The other option would be tobreak the IRA into 2 separate accounts anduse one for the SEPP and the other to make up the difference between what the SEPP allows and the $30,000 that you want.
For example, you could put abourt $300,000 in a SEPP and the balance into IRA #2. The SEPP would yield about $14,744 per year with no penalty and the balance could come out of the $83,000 with a penalty. You will have effectively cut the penalty from 10% to 5%.
The negative is that the SEPP must last 5 years and you must take5 annual distributions.2010-11-17 22:20, By: Gfw, IP: [188.8.131.52]
L2: Pension to IRAMost people are not aware of a special tax code called 72t(2)(A)(V) which differs from a standard 72t and it may very well fit your situation. Because you are retired from your employer and are over age 55, you can access the funds WITHOUT A 10% PENALTY and with no annual requirements. Check with your tax advisor. This is NOT available for IRA money so the clarification you may want your tax advisor to detemine is if you can move the pension money (I’m assuming you are in a defined benefit or cash balance plan) into a Conduit IRA and still receive the benefit of this code. I have a client who did just this (had moved the pension money to a Conduit IRA) and when the IRS questioned his Turbo-Tax return, he sent a copy of the code to the IRS and a letter of explaination and they accepted it. You would be able to take any amount you desired out of your plan without penalty and without a requirement to make the same distribution for any number of years. Good Luck!2010-11-18 20:25, By: Scott W, IP: [184.108.40.206]
L3: Pension to IRAI think your client got real lucky and was dealing with an agent that didn’t know what he was doing. Once the funds are in an IRA, they are subject to the IRA rules and the age 55 exemption is lost.2010-11-18 20:39, By: Gfw, IP: [220.127.116.11]
L3: Pension to IRAWe have been posting the benefits of the age 55 separation exception almost daily on this site as a way to avoid setting up a SEPP and becoming subject to those rigid requirements for another 5 years.
But the plan must offer annual distributions for this to work, since a lump sum distribution will inflate the marginal tax rate and can cost more than paying the 10% penalty would.
Once a qualified plan is rolled to an IRA, the IRA rules apply whether the IRA is titled as a conduit or rollover IRA or not. If the IRS let one of these through, that taxpayer was lucky to say the least, because the IRS was incorrect to have accepted the age 55 penalty waiver. Of course, a taxpayer could file a 5329 and claim one of the other penalty exceptions if they qualified, and the penalty would be waived.
A taxpayer with an IRA might be able to transfer the pre tax amounts to an accepting employer plan. If so, and if the taxpayer then separates from service in the year they reach 55 or later, any distributions directly from the plan are penalty free, including even the funds that originated in an IRA. This is another strategy that could eliminate the need for a SEPP plan.2010-11-18 20:45, By: Alan S., IP: [18.104.22.168]
L3: Pension to IRA – Part 2Scott W…
Below are the applicable sections of 72(t). Please note the sections in red – 72(t)(3)(A) removes 72(t)(2)(A) from IRA distributions. Paragraph 1 imposes the 10% penalty.Paragraph 2 outlines the exceptions to the penalty and paragraph 3 removed certain exceptions in paragraph 2 from IRA distributions.
72(t)(2) SUBSECTION NOT TO APPLY TO CERTAIN DISTRIBUTIONS. Except as provided in paragraphs (3) and (4), paragraph (1) shall not apply to any of the following distributions: 72(t)(2)(A) IN GENERAL. Distributions which are 72(t)(2)(A)(v) made to an employee after separation from service after attainment of age 55, 72(t)(3) LIMITATIONS. 72(t)(3)(A) CERTAIN EXCEPTIONS NOT TO APPLY TO INDIVIDUAL RETIREMENT PLANS. Subparagraphs (A)(v) and (C) of paragraph (2) shall not apply to distributions from an individual retirement plan. 72(t)(3)(B) PERIODIC PAYMENTS UNDER QUALIFIED PLANS MUST BEGIN AFTER SEPARATION. Paragraph (2)(A)(iv) shall not apply to any amount paid from a trust described in section 401(a) which is exempt from tax under section 501(a) or from a contract described in section
You can find the full text of IRC Section 72 here… http://72t.net/72t/IRC/Section72
2010-11-18 20:51, By: Gfw, IP: [22.214.171.124]
L4: Pension to IRA – Part 272(t)(2)(A) IN GENERAL. Distributions which are 72(t)(2)(A)(v) made to an employee after separation from service after attainment of age 55,
Isn’t there a missing piece of information from Craig H? Although he’s 57 now, he doesn’t say when he retired. As I understand this exception, you must separate from the employer after age 55. That is, if you separate from the company at 53, it’s irrelevant that you start receiving the payout at age 57. You don’t qualify for the exception.2010-12-06 07:17, By: MikeP, IP: [126.96.36.199]
L5: Pension to IRA – Part 2You didn’t miss anything and you are right about the separation from service at age 55.
After the first few posts, most of the reptiles were pointed to a reply post fromScott who said that he could use the little known exception.
The post immediately above (with red highlights)merely shows the full exception and then also shows why it doesn’t apply to an IRA even if the owner separated at or after age 55 and the funds are now in an IRA.2010-12-06 10:56, By: Gfw, IP: [188.8.131.52]
L6: Pension to IRA – Part 2
> After the first few posts, most of the reptiles were pointed to a reply post fromScott who said that he could use the little known exception.
>The post immediately above (with red highlights)merely shows the full exception and then also shows why it doesn’t apply to an IRA even if the owner separated at or after age 55 and the funds are now in an IRA.
Sorry, I meant to point my question at Scott’s post, because at that point, no one had clarified whether the separation from service had occurred on or after age 55.
2010-12-06 12:05, By: MikeP, IP: [184.108.40.206]