L1: SEPP IRA: Still Tax Deferred?
Hypothetical Question:John Doe quits job, rolls 401-k into an IRA and begins SEPP payments of $700 per month. Can he do anything he wants with the rest of the money/holdings inside the IRA?
For instance: He puts $8,400.00 in cash at the start of the year to cover the distributions for the year. Could he put the rest in dividend paying stocks & write covered call against them to generate extra returns, and if so, are those returns tax deferred
Thanks In Advance!
2011-12-26 10:24, By: steve, IP: [126.96.36.199]
L2: SEPP IRA: Still Tax Deferred?
A SEPP plan IRA has no investment related restrictions as a result of the plan, and a participant could do as stated in your post. Of course, there is always a need for liquidity to enable the SEPP distribution, although an inkind
distribution of shares satisfies the requirement just like cash would. A participant that ties up the entire balance in CDs may have problems avoiding CD early withdrawal penalties unless they are probably laddered.
A SEPP plan properly implemented will waive the early withdrawal penalty for IRA distributions, but other than that there is no difference in the ordinary income tax rules as a result of the plan. The distributions are taxable
except to the extent the participant made non deductible contributions and filed Form 8606 to document them, just as if there were no SEPP plan. Doing partial distributions to a new IRA has caused problems with the IRS in a couple of cases.
But generally speaking, you still have complete investment flexibility in the plan as before. Only the actual distributions are material to the validity of the plan, along with the accuracy of the initial calculations. But simple
vrs complex is generally advisable when it comes to SEPP plans.
2011-12-26 17:30, By: Alan S., IP: [188.8.131.52]
L3: SEPP IRA: Still Tax Deferred?
Since you are being hypothetical, why don’t you start with his age/date of birth ?
If he would be 55, or older,by the end of the year that he “separates from service” (i.e. retires, quits, or is terminated), and if the 401-K plan allows it, then he could take partial withdrawals in accordance with the 401-K plan from then until 59 1/2,
without being subject to the 10% early withdrawal penalty, and without the necessity of even setting up a SEPP 72-T plan.
If you are a financial advisor, you should know this. I see ads all of the time from brokers and mutual fund companies inviting people to roll over their 401-K plans to IRAs, and not telling them that it might not be necessary.
2011-12-26 19:11, By: dlzallestaxes, IP: [184.108.40.206]