Retirement at age 59

L1: Retirement at age 59Have a question. There is a possibility that I may retire at the end of the year (forced). I will be 59. I will have a lump-sum pension buy out of about $300,000 and also I have about $450,000 in my 401k. I think I can start making withdrawals from my 401k w/o the additional 10% penalty, because all my 401k money is from the same employer. Also, my company will allow me to leave my 401k money where it is, and the plan allows me to make withdrawals. Should I roll over the lump sum pension buy-out to an IRA?2007-05-16 10:52, By: ken, IP: [144.160.98.31]
L2: Retirement at age 59NOT IF THERE IS EMPLOYER STOCK IN YOUR PENSION. If so, there is a fantastic tax-saving provision in the tax code called “NUA” (Net Unrealized Appreciation”). Despite its complexity, the simplest explanation is as follows :
1. DO NOT ROLLOVER PENSIONS WITH NUA STOCK TO AN IRA.
2. TAKE A LUMP-SUM DISTRIBUTION TO YOURSELF DIRECTLY, AFTER YOU ARE 59 1/2.
3. PAY ORDINARY INCOME TAX ON THE EMPLOYERS” STOCK BASED ON THE COST TO THE EMPLOYER WHEN HE PUT THE STOCK IN THE PLAN. (THIS ALSO APPLIES TO EMPLOYER MATCHING.)
4. TAX ON THE “UNREALIZED APPRECIATION” (i.e. the increase in value between the employers” cost and the value when you sell it) IS DEFERRED UNTIL THOSE SHARES ARE ULTIMATELY SOLD.
5. THE GAIN WHENEVER SOLD IS TAXED AT “LONG-TERM CAPITAL GAINS TAX RATES” (currently 15%), AND DO NOT HAVE TO BE HELD 1 YEAR TO BE DEEMED TO BE “LONG-TERM”.
6. This provision makes sense primarily when there has been significant appreciation in the employers” securities.
There is an excellent summary of the various aspects and nuances of this provision in J.K.LASSER “YOUR INCOME TAX 2007”, pages 159 and 160. A great investment for under $ 20 at your local bookstore or office supply master store.
P.S. This does not apply to IRAs.2007-05-16 11:16, By: dlzallestaxes, IP: [141.151.59.84]

L2: Retirement at age 59Hello Ken:
Assuming that you do not have employee stock in either your pension plan or K-plan, then your idea to rollover the lump-sum distribution from your pension to an IRA, and to make withdrawals from the K-plan until your reach age 59 1/2 sounds like a good plan. Since you will retire (or get “sacked” as the case may be) after your age 55, then withdrawals from the K-plan will not be subject to the 10% penalty. Doing this process you will avoid having to utilize 72(t) altogether.
Once you reach age 59 1/2 you will probably want to process a trustee-to-trustee rollover of the K-plan into the same IRA where you put your lump-sum pension funds. This will simplify management of your funds for both investment and distribution options.
If you do have employee stock to deal with, then find someone with good knowledge and experience working with the process to deal with this situation. It takes several months to complete this transaction. Since you will be retiring late in the year, wait until early next year to begin the process of dealing with company stock,which may delay your rollover of the pension money.
Good luck.
Jim2007-05-16 12:06, By: Jim, IP: [24.252.195.14]

L2: Retirement at age 59While you would not actually begin to implement NUA opportunities until next year, now is a good time to at least get a cost basis quote on your company shares, and from that you can probably either dismiss the NUA possiblity or begin to consider how you would mix and match NUA with the other options you will have. Diversification is also critical and you should not enter retirement with more than 15% max and preferably less in the shares of one company, and that will also play into your NUA strategy.
While most people are better off rolling over employer assets to an IRA (other than NUA shares which would forfeit NUA use), there are some unique situations where the rollover has no comparative benefit. At least, you will be able to avoid the complexities of a SEPP plan, being this close to 59.5.
If your cost basis in the company shares is attractive (less than 40% of current FMV), then get familiar with the requirements of a proper lump sum distribution for NUA purposes, and the concept of triggering events and intervening distributions, because those technicalities determine if you can utilize NUA in a particular year or not. In a nutshell, your last triggering event is turning 59.5, if that happens after you separate from service, and if you take distributions from the 401k plan in a year following that year, you can nullify your use of NUA.
You should also learn more about the regular pension plan. Is it a standard defined benefit plan which has been modified to a cash balance or other hybrid plan? If you are married, what is the % death benefit for your spouse? How is the interest rate determined if there is a lump sum option as affected by the recent Pension Protection Act? Where will your health insurance come from and at what cost until you reach 65 and go on Medicare? What are the chances of further work after this separation? Thinking about some of these issues now will also prepare you for having to sign a separation agreement with not much notice later on or time to generate needed information regarding the various plans.

2007-05-16 17:00, By: Alan S., IP: [24.116.66.98]