Rollover of 401k and distribution

L1: Rollover of 401k and distributionI”m 56 years old and recently lost my job. I have a 401k with my former employer and would like to do a direct rollover to a IRA (Bank CD) 5year. Then I would like to take the interest only from the CD monthly as income for the 5 years. Can this be done without the 10% early withdrawal penalty. Would this be SEPP?? (It would be equal interest payments monthly for the 5 years.2006-06-02 13:31, By: yankee, IP: [68.9.94.222]
L2: Rollover of 401k and distributionHello Yankee:
Certainly there is nothing wrong about rolling over your 401(k) account balance into an IRA at your bank & then purchasing one or more CDs within that account.
At age 56 & therefore a life expectancy of 28.7 and a maximum allowable interest rate assumption of 5.82% results in an annual withdrawal of $7,250 per $100,000 or 7.25% of the principal. Since bank CDs are nowhere near this high in their payouts then this would be okay. However, it is not okay because you are simply drawing off the interest on the CDs; it is okay becuase you would be adopting a SEPP plan that makes an interest rate assumption that is permissable.
TheBadger
wjstecker@wispertel.net

2006-06-02 16:20, By: TheBadger, IP: [66.109.211.254]

L2: Rollover of 401k and distributionYou might also check with the 401k plan to see if they offer flat installment payments for at least 3 years. If this is the employer you just separated from, payments are not subject to penalty under the age 55 exception. This is NOT a SEPP, just an installment payout, but if they agree (perhaps a long shot), you can avoid the formalities of a SEPP, particularly since you will be 59.5 in 3 years or so. Then, at 59.5, you can rollover the remaining balance to an IRA and have complete flexibility from there. While still not common, there are more 401k plans willing to play ball to retain assets longer. If they retain more assets, they can reduce management fees etc.2006-06-02 16:33, By: Alan S., IP: [24.116.165.157]

L2: Rollover of 401k and distributionBadger: Thanks for the information. I believe that you are saying this is OK to do and that I will not have to pay the 10% early withdrawal penalty. How do I set up the SEPP with the bank. I have read that there is (3) methods (life expectancy, amortization and annuity) Is it OK to collect less that what either amortization or annunity amounts come out to??? Will the IRS accept that I am just taking less than the 5.82% that you quoted?2006-06-03 10:11, By: Yankee, IP: [68.9.94.222]

L2: Rollover of 401k and distributionHello Yankee:
Your second posting gives me the impression that you are rather a neophite with respect to this process; no insult intended. Conversely, SEPP plans can range from very simple to pretty complex and require knowledge and then planning, re-planning and re-re-planning. It is essential to get everything right before the 1st distribution is ever made.
To that end, I suggest you start with the articles here at the website and play with the calculators; then, consider buying the book for sale here (I am the author). When you can say to yourself: I know what I need to know and I am confident of my path; then you are ready to launch a SEPP plan.
TheBadger
wjstecker@wispertel.net

2006-06-03 10:24, By: TheBadger, IP: [66.109.211.254]

L2: Rollover of 401k and distributionBadger: I just want to make sure that I understand what you are saying. As long as the interest rate (5.5%) that the bank is offering on the 5 year CD is less than the 120% Federal Rate (5.82%) and the payout would be less than the 7.5% of account value, that this would be allowable by IRS rulings.2006-06-08 11:07, By: yankee, IP: [68.9.94.222]

L2: Rollover of 401k and distributionThat”s not exactly what he said. Best place to start ios bny taking the account balance and the interest rate that you want to use(anything less than the maximum is acceptable) go o the calculator and calculatea payment based on your age. 2006-06-08 11:15, By: Gfw, IP: [172.16.1.77]

L2: Rollover of 401k and distributionI”ve done that, however, if we start with an account Balance of say $100,000 and the interest rate on the CD is 5.5% that would equal $5,500 yearly. Does the interest rate in the calculation need to be exact so that the payments come out to exactly $5,500?? I”ve used my life expectancy and 4.50% and the numbers don”t come out exactly the same. Will the IRS accept this?2006-06-08 11:46, By: yankee, IP: [68.9.94.222]

L2: Rollover of 401k and distributionNo. But, you will be ok if your withdrawal iswithin $1.00 of the calculated annual payment based on the proper assumptions.
Also remenber that once you start wit that payment, you can”t change it until the later of 5 years or age 59.5
2006-06-08 14:34, By: Gfw, IP: [24.148.5.55]

L2: Rollover of 401k and distributionYankee:
I think you”re missing the point in the expert advice others are giving.
1. If you have no objection to leaving your 401-K with your former employer, then ask him if their plan allows youto take withdrawals before age 59 1/2 since you have “separated from service”. If they do allow it, then ask what the amounts are that you can withdraw. As others have stated, in your situation, you may be able to take the withdrawals you want or need from your 401-k,and avoid the necessity to be involved in the complexities,regulations, and restrictions of a SEPP.This technique that we are describing are available in my cases for those who “separate from service” after reaching age 55, and if their 401-k allows it. You can change your investments within your 401-k to become more conservative in fixed interest investments that the 401-k offers, rather than mutual funds that invest in stocks. This is preferable to a SEPP because the SEPP will lock you in for 5 years, while the 401-k approach has no restrictions, and no 10% penalty.
2. If you are concerned about leaving your 401-k with your former employer, then you can do a “trustee-to-trustee transfer/rollover” into an IRA you have or set upat abank, broker, or mutual fund family, Then, as statedby others, you can chose from a broader selection of investments. However, you wouldthen have to set up a SEPP in order to provide the cash flows that you need to withdrawto live on. The SEPP will lock you in for 5 years, with no “wiggle room”. If you set up a SEPP, consider doing it with no more than 75% of your money, in order to give yourself flexibility in case you need some additional money in the next 5 years. Further, you would only be subject to the 10% penalty on these “emergency funds” that you withdraw until you are 59 1/2.
3. If you were “permanently disabled” when you lost your job, you may qualify for a waiver of the 10% penalty for any IRA distributions before age 59 1/2 since you were past 55.
4. There are other situations that permit withdrawals from IRAs before 59 1/2 without the 10% penalty, including to pay for health insurance premiums for certain unemployed individuals, and funds used to pay for medical expenses to the extent they exceed 7.5% of AGI (Adjusted Gross Income).
As you can see, there are many alternatives to consider. Get expert advice from an experienced CPA or tax advisor, or financial planner.

2006-06-08 17:37, By: dlztaxes, IP: [4.175.9.205]

L2: Rollover of 401k and distributionIf you set up a SEPP improperly is the 10% penalty only charged against the distribution that you take out?2006-06-12 16:19, By: yankee, IP: [68.9.94.222]

L2: Rollover of 401k and distributionI think this question is a good one and calls for a code interpretation unless the IRS has specifically ruled on the issue. So this is my opinion and very open to comment:
Let”s say you start your SEPP and comply in the first 3 years, but in the 4th year you exhaust all other planning options such as switching to RMD, starting another plan etc. You realize you must bust your plan and understand you will owe the penalty plus interest for those first 3 years. But, what about the current 4th year?
Here is my guess on that:
1) If you take NO distribution, there is no penalty for what you should have taken but did not.I can”t find anything that assesses the 10% early withdrawal penalty when there is no withdrawal in the year of modification. I do not believe that IRA custodians are going to issue a 1099R when there has been no distribution just to enter a Code 1 in Box 7. Since most busts are probably from needing MORE money, this scenario is not too likely.
2) If you take a busting distribution, you owe the penalty for it because the original plan includes the year of modification. If you take less than required, the penalty applies to what you took, not to what you should have taken (see 1 above). If you take more, then the penalty applies to what you did take. You should get a 1099 R with a Code 1 in Box 7. You could then start a new SEPP in the following year.
3) It has been opined that you can bust the plan mid year and start a new plan, deeming the year of modification to be only the part of that year elected by the taxpayer, rather than the entire year. You owe taxes for the year of modification, which would appear to include all distributions taken in the current modification year and prior years.A 5329 will have to be attached with a statementfor paying all the retro penalties. This is where youwould also have to attempt to make your case to exempt payments aftera certain date in declaring a new SEPP plan inception date making that year both a modification year and a new SEPP plan inceptionyear. Without a PLR, this is probably the luck of the draw????????2006-06-12 18:33, By: Alan S., IP: [24.116.165.157]