Question on starting balance

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L1: Question on starting balanceFirst of all, thank you all so very much for posting this website, and to the folks asking questions and providing answers.
Seems like there isn’t a lot of expertise on this subject readily available, and you all have been really helpful in provided me insight to the 72T rules.
Here’s my question.
I’m being forced into early retirement at the end of June 2012, rolling a 401k balance and my company lumpsum pension into an IRA so that I can take SEPP distributions (I’m 53 years old). Can I use the amortization methodology calculation based on the total balance that I roll into the IRA as of end of period June 2012. I thought I read somewhere that you had to base your calculation on the balance amount at the end of the prior year (which in this case, would be Dec 2011).
However, since I never really started my IRA until June 2012, I wasn’t sure whether using prior year balance would still apply..or if I could base the calculation off the balance rolled as of June 2012.
Thanks for your advice.
2012-03-31 19:54, By: rjt, IP: []

L2: Question on starting balanceBefore you do anything, ask your HR dept or plan administrator what the NUA ( Net Unrealized Appreciation) situation is for your 401-K acct. (i.e. cost basis of company stock in your plan). If the company stock has appreciated> 25% over the years, then meet with a tax advisor to discuss the advantages of NOT ROLLING YOUR 401-K OVER TO AN IRA, and taking a direct distribution, rather than your plan involving a SEPP 72-T.
You probably would not/could not use the 12/31/2011 balance in your 401-K anyway, because you would want to use the highest value in your IRA after the rollover, which wouldn’t be last Dec anyway.
Also, you should take into consideration your 2012 tax situation, especially with any final wages/bonuses/severance/vacation pay, etc which will be taxed in 2012. You will be allowed to take EITHER 50% (6/12) of the ANNUAL DISTRIBUTION AMOUNT, or 100% of it, in 2012. You will have a tax and cash needs decision to make in that regard.
Further, use the reverse calculator on this site to determine the minimum that you will need tp put in a SEPP 72-T, and therefore how much you can tarnsfer to a non-SEPP IRA for future 2nd SEPP or emergency funds until you are 59 1/2.2012-03-31 20:11, By: dlzallestaxes, IP: []

L3: Question on starting balanceI may be wrong, but I recall that if you separate at 53, you cannot take the penalty free 401k withdrawals that others can take if they do not separate until the calendar year in which they turn 55. In addition, altho DLZ’s 6/12th comment is a good one if it helps with taxes,it only applies if first payment is taken in July 2012. For example, if first payment is taken in August, it is 5/12ths or optional full year amount that shd betaken in the 2012 year. I see no problem in using starting balance in the new IRA after rollover to compute the plan payments and amortization is highest paying method. I do not even think you are allowed to use a balance from the 401k if the payments are being withdrawn from an IRA after they are rolled over from the 401k. Good Luck.2012-03-31 23:59, By: Ken, IP: []

L4: Question on starting balanceYou are correct, but the figures determine the best approach.
If the employer stock cost $ 25,000 and is now worth $ 225,000, only the $ 25,000 is taxable on an NUA distribution of the employer shares, and then that would be subject to the 10% penalty before 59 1/2.
However, you get all $ 225,000 out of any retirement account, which would ultimately be taxed at probably 25% when it is taken out, PLUS 25% tax on the appreciation and accumulated dividend income. On the other hand, by taking an NUA distribution, the $ 200,000 appreciation will not be subject to taxation until the shares are sold ( over time), the appreciation over the employer cost will be taxed at 15%, rather than 25%, and the dividend income each year will be taxed at 15%, rather than at 25% ultimately. Even if these shares are sold the day after you retire !!!!
Furthermore, I saved a client over $ 100,000 in taxers on an $ 800,000 distribution by also using these shares, which were now in a non-retirement account, as security for “margin loans” during his year of retirement, thereby providing tax-free cash flow. Then, in the next few years I structured his taxable income to be in the 15% tax bracket ( which is up to $ 69,000 taxable, or at least $ 88,000 of gross income under 65 on a joint return, and $ 90,300 when both taxpayers are over 65).
It pays to consider this approach with a sharp, experienced tax or financial planner.2012-04-01 00:43, By: dlzallestaxes, IP: []

L5: Question on starting balanceWith respect to the initial account balance for the SEPP, in the case of a rollover IRA funding the plan, there is no choice but to use the IRA balance once the entire rollover is completed, including any trailing dividends if applicable. In the case of this post, there should be no need to rush into establishing the plan because regardless of which month the first distribution is taken, the option will still remain to take out the full annual amount. Taxes should be considered vrs the need for cash, but hopefully with severance and other possible payments, the need for immediate SEPP cash should be limited.
If there are highly appreciated employer shares in the plan, the use of NUA can be used to supplement a SEPP plan, and in certain cases to even avoid a SEPP plan. More frequently this tool can be used in conjunction with the SEPP to reduce the amount of funds needed from the SEPP. This leads to a smaller IRA account for the SEPP and a larger IRA account outside the SEPP for emergencies. The future of LT cap gain rates is in doubt, but it is almost certain they will remain below the ordinary income rates, the question is by how much.
If the 401k plan also contains after tax contributions, this presents another more complex planning opportunity when NUA is included. The after tax contributions can be used to reduce the ordinary tax and penalty on the cost basis in most cases, but the employee needs to check with the employer to determine how the plan assigns after tax amounts between the IRA rollover and the employer shares.
Diversification should always trump the potential tax advantages of holding too much employer stock.
2012-04-01 01:09, By: Alan S, IP: []