Taking SEPPs from 401K and 403B
L1: Taking SEPPs from 401K and 403BMy Background
1) New SEPP plan that I hope to put in place with an annual payment in September 2016.
2) Former employer will let me take SEPPS from 401K and 403B accounts.
3) Birthdate 2/1/63
4) Needing dependable income and flexible schedule to help out aging parents, and what state we may all end up living in is simply not clear at this point.
My Questions (please feel free to point out things I’ve overlooked or misunderstood. I’ve done my best to digest most of this site.)
1) I want to start things at some point inSept. 2016 because the 120% Midterm Applicable Federal Rates seem to be heading down, and I want to get the 1.71% AFR. I’m shooting to start on Sept. 16, 2016. I don’t have to start at the beginning of the year, right?
2) The starting balance criteria seems a bit fuzzy to me.The sample form provided on this site (much appreciated) says:To comply with RR 2002-62, the initial valuation date should probably be the December 31 of the prior year, or on a date within a reasonable period before that year’s distribution.I’d prefer to use the balance of my 401K and 403B accounts as of say Sept. 1, 2016, rather than Dec. 31, 2015, because they are higher. Does that fall under the umbrella of “a date within a reasonable period before that year’s distribution”?I read through RR 2002-62 and it didn’t clarify things for me.
3) My sense is to keep the funds where they are rather than transferring them to an IRA, as I understand that 401K and 403B accounts are safer from lawsuits than IRAs. (I also understand that whether this is an issuevaries from state to state, but what state I’ll end up in is still unknown.) Anything wrong with this approach?
4) In the short term, I’d go for an annual payment in September to help my cash needs now. Down the road, I’m thinking maybe monthly payments are a better hedge against a volatile stock market (sort of like a reverse dollar-cost averaging strategy, hee). Is it possible to switch from annual to monthly payments in a subsequent year, or am I just asking for trouble with the IRS or really being a pain to my account administrator?Is the general consensus that it’s better to do monthly payments? I could make that work too.
5) These retirement accounts are administered through Fidelity. The form they gave me for “Distribution-Recurring Payments” only gives one option for “Reason for Distribution,” which is “separation from service.” Nowhere on the Fidelity form is there a way to identify these recurring payments as SEPPs. Is that a big red flag that I’ll have issues with the iRS? I’ve read the post from daigledated 1/10/2010, and I want to avoid his painful IRS audit!I’ll certainly follow-up withFidelity to see if they will submit the proper 1099 form to the IRS to help avoid an audit.
Thanks for any help folks can provide—sorry this is so long! I’m grateful and appreciative for the wealth of information on this site. In my case, the SEPPs could go a long way in helping me honor my commitment to my parents.2016-08-25 17:26, By: Ms.Tessie, IP: [18.104.22.168]
L2: Taking SEPPs from 401K and 403BI am also interested in any response to this post. Does anyone monitor and provide answers?2016-09-06 18:57, By: Kevin, IP: [22.214.171.124]
L2: Taking SEPPs from 401K and 403BSorry for delay. This site has been off line for several days, so could not access it.
1)You are correct.You do not have to take a full annual distribution this year. But you can if you want to. Otherwise, you would take out a pro rated annual amount of 1/3 of the annual calculation.
2) You can use the 9/1 balance, or perhaps the 8/31 month end balance would be better since you can easily document that with a copy of the monthly statement. The main point is that the balance you use must be reasonable in relation to the current value, so often a balance closer to the present will be more reasonable.
3) Yes. While maintaining a SEP can be done from either a qualified plan or an IRA, it is safer to use an IRA because you have more control. Many qualified plans may restrict your distribution frequency, may notice that a prior company contribution was incorrect and must be corrected, and will not take back a distribution if you made an error and took out too much. These plans can also be changed in the future and the plan administrator can be changed. With an IRA you have total control of your distributions, if you distribute too much you can roll the excess back into the IRA etc. Also, if you use a 401k and 403b you must have a separate SEPP from each plan. In fact, it is possible that one of these plans may not even be able to make your first distribution before October, or may not allow partial distributions. All this said, if you do direct rollovers to an IRA and start one plan, your first distribution will probably not be in Sept., although you can still take out a full annual amount.And your opening balance for the calcs would have to be after both direct rollovers were deposited in the IRA. Most states protect IRAs from creditors. What state are you in now?
4) You can shift from an annual to monthly to quarterly or even to random distributions from year to year. The only requirement is that the annual total on the 1099R be exactly correct.
5) This is yet another indication that plans do not provide support for SEPPs. While your SEPP is actually between you and the IRS, having a custodian that understands SEPPs and know you are using one may help you avoid an error in execution. Do not worry about the 1099R coding since most all custodians no longer want to underwrite the accuracy of your distributions, and will not provide the SEPP code, so you have to file a 5329 and override the 1 code with exception code 02. If you still want to use these plans for your SEPP, at least Fidelity is a large professional plan administrator, and your plans are not administered by a company committee with inexperienced staff. You should ask to talk with someone at Fido who understands SEPPs well, and it may be hard to track down such a person. Try to determine what level of support they offer. Remember though that the plan itself could change administrators anytime and that can produce risks.
2016-09-08 22:48, By: Alan S, IP: [126.96.36.199]