SEPP from IRA in same year as 401K withdrawals

L1: SEPP from IRA in same year as 401K withdrawalsI have a client who has received early withdrawals in 2016 from a 401(k) which will be subject to tax and penalty. He also wants to set up a SEPP plan for his IRA and take the first of his 5 withdrawals before 12/31/2016. I believe he can do this and that the 401(k) withdrawals will not “bust” his SEPP plan. Am I correct in this assumption ordid I miss something in my research?2016-12-02 18:46, By: ToddW, IP: [97.86.74.222]
L2: SEPP from IRA in same year as 401K withdrawalsIRAs and 401-k/403-B accounts are mutually exclusive as far as contributions, withdrawals, RMD’s, and balances.2016-12-02 18:50, By: dlzallestaxes, IP: [173.59.24.3]

L3: SEPP from IRA in same year as 401K withdrawalsThank you for that confirmation – that is the conclusion I came to from my research as well. Unfortunately he will owe penalty on any 401(k) withdrawals but at least it does not trigger any penalty on the SEPP.2016-12-03 13:14, By: ToddW, IP: [97.86.74.222]

L2: SEPP from IRA in same year as 401K withdrawalsAssuming nothing has been done already on the SEPP IRA, if it is just being set up in December and being treated as a stub year, he’d be looking at 1/12 of the annual amount.
He will get a separate 1099 for the 401(k) vs the SEPP IRA for the year.2016-12-03 01:50, By: brkr12002, IP: [68.98.39.252]

L3: SEPP from IRA in same year as 401K withdrawalsJust to clarify, in the 1st calendar year you have an option of taking the entire annual distribution, even if starting the plan in Dec, or the monthly proration.2016-12-03 02:44, By: dlzallestaxes, IP: [173.59.24.3]

L4: SEPP from IRA in same year as 401K withdrawalsHis plan is to take the entire annual distributionfor 2016 in December and then the entire annual distribution for 2017 in January. He will then obviously not take any further distributions until 2018 and beyond…2016-12-03 13:12, By: ToddW, IP: [97.86.74.222]

L3: SEPP from IRA in same year as 401K withdrawalsCan’t tell from your post, but if client separated from the employer with the 401k in the year he turned 55 or later, distributions from that 401k qualify for the penalty waiver for separation at 55 or later. Further, if that were the case, the SEPP may not even be necessary.2016-12-03 02:45, By: Alan S, IP: [174.126.90.174]

L4: SEPP from IRA in same year as 401K withdrawalsAlan makes a good point. Also, he should check with HR to see if his 401-K plan has employer stock which has appreciated. If so, there is a special fantastic tax provision called NUA ( Net Unrealized Appreciation). (See other postings on this website, or research it accordingly.)2016-12-03 02:51, By: dlzallestaxes, IP: [173.59.24.3]

L4: SEPP from IRA in same year as 401K withdrawalsUnfortunately, he separated from that employer over a decade ago when in his 40’s, so that provision is not available. I appreciate the idea – it would have been great if that would have worked!2016-12-03 13:10, By: ToddW, IP: [97.86.74.222]

L5: SEPP from IRA in same year as 401K withdrawalsBut the NUA provision may still apply.2016-12-03 16:20, By: dlzallestaxes, IP: [173.59.24.3]

L6: SEPP from IRA in same year as 401K withdrawalsUnfortunately no employer stock….2016-12-05 19:42, By: ToddW, IP: [97.86.74.222]

L7: SEPP from IRA in same year as 401K withdrawals>>>>His plan is to take the entire annual distributionfor 2016 in December and then the entire annual distribution for 2017 in January. He will then obviously not take any further distributions until 2018 and beyond…>>>
Not sure of his age, but if his first distribution is after the date he reaches 59.5, he will have a 5 year plan. If so, if he takes a full annual distribution this month, his plan will end sometime in December, 2021. He will then take full annual distributions in 2017-2020.
Accordingly, there is a budgeting concern resulting from his planned distribution schedule. If he starts taking his annual distributions in January as he plans to do for 2017, his final distribution will be taken in Jan, 2020 fully 23 months before his plan terminates.
This is similar to the Arnold v Commissioner case where Arnold took a non SEPP distribution before the 5 year period was completed. It is not totally clear if the client here will be able to go the full 23 months from the 1/2020 distribution to late December, 2021 before taking another distribution. It is also not clear if he takes a distribution in 2021 (a 6th calendar year) whether he will bust the plan or not. In Arnold’s case, he took his 6 th distribution in addition to his 5th distribution in the 5th calendar year, not the 6th but the IRS verbiage leaves some doubt if he can take ANY additional distribution before the plan ends, even in 2021. Many people with the full payment available in January will be struggling by the end of each year to get to the following January.2016-12-06 00:21, By: Alan S, IP: [174.126.90.174]

L8: SEPP from IRA in same year as 401K withdrawalsI opt for people like this I try to protect them from themselves. If he takes a full year’s distribution in Dec 2016, I doubt that he NEEDS another full year in Jan 2017. I would get him used to “budgeting” his money by waiting until June 2017 for a semi-annual distribution, and maybe quarterly in Sept and Dec 2017. If he doesn’t handle the quarterlies well, then I would go to monthly in Jan 2018.
If he is going to use the money for a MAJOR purchase, like a property he doesn’t NEED, then he will probably bust the plan anyway at some point, and similarly if he is paying off credit card balances.2016-12-06 00:59, By: dlzallestaxes, IP: [173.59.24.3]