SEPP for 401k vs. IRA

L1: SEPP for 401k vs. IRA(Note: second try, my first post disappeared۝ upon submission I should’ve copied it first!)

Hi! I have a question regarding starting a SEPP without penalty this month (June) on my 401k account. A representative of my company’s 401k administrator (Fidelity) questioned whether I was sure I could use a SEPP for a 401k, since, she said, the 72t rules were written for IRAs, not 401k plans. I realize I could roll over my 401k into an IRA, but doing so would lose me access to a money market fund currently paying over 4% per year (where 70% of my 401k funds currently reside), plus some mutual funds such as Oakmark Select that are closed to the general public. I could not maintain these investments in an IRA rollover, even to Fidelity. So, my major question is, do the 72t provisions for SEPPs without penalty prior to age 59 _ apply to 401k plans as well as IRAs, or do I need to first roll over my 401k plan into an IRA?

Secondly, I’d like to verify the numbers I am using to calculate my SEPP, trying to maximize this number without incurring penalty. I am using the amortization method, with an assumed rate of return equal to 120% of the mid-term AFR for May ’03, or 3.82%. Since I turn 55 in July of 2003, my life expectancy is 29.6 years (from this web site’s calculator). The total amount as basis for the SEPP is the entire value of the 401k account on 5/31/03, the last day of the month prior to the month of first SEPP withdrawal (June), minus the $3000 I withdrew without penalty earlier this June to cover excess medical expenses (I’m aware that this is the last time I can do so without penalty while the SEPP is in operation for the next five years). And what is the best way to document these numbers for my 2003 tax returns (such as printing this web site’s calculation page)? Is the life expectancy table shown on this site that gives the 29.6 years used in the calculator? (Note: I am familiar with the calculation itself, it is no mystery, and I can perform it myself on my scientific hand calculator. The concern is documenting the numbers used in the calculation, not the calculation itself.)

Thanks in advance for all the assistance you can provide!
Rick2003-06-10 14:18, By: Rick, IP: [127.0.0.1]

L2: SEPP for 401k vs. IRA#1 – Reference the Fidelity rep. to Revenue Ruling 2002-62, Section 1.01 – it’s really pretty clear.
#2 – I didn’t (and don’t) check the numbers (I juist don’t have the time), but if you are using the calculators, you should have no problems. Documents to have would include a description of the plan (see the Sample in the left menu) and copies of the account statement that has the values on the date the payments start.

2003-06-10 14:26, By: Gfw, IP: [127.0.0.1]

L2: SEPP for 401k vs. IRAHi! I have a question regarding starting a SEPP without penalty this month (June) on my 401k account. A representative of my company’s 401k administrator (Fidelity) questioned whether I was sure I could use a SEPP for a 401k, since, she said, the 72t rules were written for IRAs, not 401k plans.

Recveiving bad information from a brokerage (Fidelity or otherwise) is very common. Fidelity is albsolutely dead wrong. IRC 72(t) applies to ALL deferred accounts: 401(a), 401(k), 403(b), etc. as well as IRAs.

I realize I could roll over my 401k into an IRA, but doing so would lose me access to a money market fund currently paying over 4% per year (where 70% of my 401k funds currently reside), plus some mutual funds such as Oakmark Select that are closed to the general public. I could not maintain these investments in an IRA rollover, even to Fidelity. So, my major question is, do the 72t provisions for SEPPs without penalty prior to age 59 _ apply to 401k plans as well as IRAs, or do I need to first roll over my 401k plan into an IRA?

Often, the more difficult issue is creating a periodic distribution plan directly from a 401(k) plan remembering that the plan does ntohave to do this; it is elective based on the plan document and the decision-making of the plan administrator.

Secondly, I’d like to verify the numbers I am using to calculate my SEPP, trying to maximize this number without incurring penalty. I am using the amortization method, with an assumed rate of return equal to 120% of the mid-term AFR for May ’03, or 3.82%. Since I turn 55 in July of 2003, my life expectancy is 29.6 years (from this web site’s calculator). The total amount as basis for the SEPP is the entire value of the 401k account on 5/31/03, the last day of the month prior to the month of first SEPP withdrawal (June), minus the $3000 I withdrew without penalty earlier this June to cover excess medical expenses (I’m aware that this is the last time I can do so without penalty while the SEPP is in operation for the next five years). And what is the best way to document these numbers for my 2003 tax returns (such as printing this web site’s calculation page)? Is the life expectancy table shown on this site that gives the 29.6 years used in the calculator? (Note: I am familiar with the calculation itself, it is no mystery, and I can perform it myself on my scientific hand calculator. The concern is documenting the numbers used in the calculation, not the calculation itself.)

The numbers look right to me; however, you raised the issue that you are 55 this summer. By any chance were you still employed with the 41(k) plan sponsor earlier this year? If so, you can forget about all the rules of SEPPs (IRC 72(t)(2)(A)(iv)) & insterad switch to the “Separation of Service” option (IRC 72(t)(2)(A)(v)) and simply distribute whatever amount oyu desire whenever you desire.

TheBadger
wjstecker@wispertel.net

2003-06-10 14:30, By: TheBadger, IP: [127.0.0.1]

L2: SEPP for 401k vs. IRAThanks for the quick responses. As a follow up question, given that I’m trying to maximize the SEPP given the abnormally low interest rates, I note that the annuitization method yields more than the amortization method if certain life expectancy tables are used. Are there limitations on which tables may be specified for the calculation? TIA again!
Rick2003-06-10 15:52, By: Rick, IP: [127.0.0.1]

L2: SEPP for 401k vs. IRAIf you have qualified money, then there is only one choice and it is set as part of the default when the calculator appears – the annuity 2003 table! From the calculator page…

Thedefaultvalues below are set to values that would be acceptable under Revenue Ruling 2002-62.However, be sure to verify the interest rate using the link in the menu on the left. The default rate is 120% of the mid-term assuming the plan is started in the current month.
2003-06-10 16:04, By: Gfw, IP: [127.0.0.1]

L2: SEPP for 401k vs. IRAAs a follow up question, given that I”m trying to maximize the SEPP given the abnormally low interest rates, I note that the annuitization method yields more than the amortization method if certain life expectancy tables are used. Are there limitations on which tables may be specified for the calculation?
Although I have not tested every table/life/interest rate intersection; I beleive that when using the same mortality table the amortization method always produces(ed) a higher annual distribution. Now, pre-1/1/03; it was only the annuitization method that permitted the selection of a mortality table; the result of which was that most people chose the UP-1984 table with the anuity method to get a 5% – 7% higher annual distribution than the amortization method.
However, no more; all three methods use the same tables as published in RR 2002-62 and Publication 590; therefore commencing in 2003 the amortization method will always yield the highest annual distribution.
TheBadger
wjstecker@wispertel.net
2003-06-10 16:09, By: TheBadger, IP: [127.0.0.1]

L2: SEPP for 401k vs. IRAThanks once more, Gfw and Badger! I guess I’ll have to go with the amortization method, given that the 2003 lifetime expectancy tables don’t net me any more with the annuitization method. It seems that the government, with the new limitations on assumedinterest rates and life expectancy tables, wants to minimize the allowed SEPPs. And yet, faced with a possible coming deflationary spiral as in Japan, lawmakers are already talking about a possible “carry tax” on savings, thereby “encouraging” people to spend their savings. Go figure! Anyway, thanks again for your help!
Rick2003-06-10 16:29, By: Rick, IP: [127.0.0.1]