Withdraw after tax contributions before starting the SEPP?
L1: Withdraw after tax contributions before starting the SEPP?I have a substantial amount of dollarsin my 401K that I contributed after tax over the years. Can this money be withdrawnbefore beginning my SEPP and then calculate the SEPP paymants on what remains?Thanks.2009-06-25 01:58, By: Len, IP: [18.104.22.168]
L2: Withdraw after tax contributions before starting the SEPP?Len,
First of all, I will assume that you have separated from service from this employer. You cannot withdraw after tax contributions by themselves with the exception of pre 1987 after tax contributions tracked separately by the plan. Your statement should indicate if you have such contributions. If so, you should be able to withdraw them before starting a plan.
However, it is preferable to do a direct rollover of your plan to an IRA and then start your plan from the IRA rather than trying to use the 401k for your plan. It is possible to use a 401k plan, but generally plans do not understand or support what you are doing, and may well not even allow you to take periodic distributions as needed. An IRA allows you much more flexibility including rollovers of errors to save your plan and/or separating the IRA into more than one account and only using one of those accounts for the SEPP. The other would be for emergencies and one time needs.
In fact, if your plan allows you to take annual distributions AND you separated from service in the year you turned 55 or later, then you do not even need a SEPP plan because the distributions directly from the plan are penalty free. If you take distributions from the plan they are pro rated between after tax and pre tax dollars with the exception of the pre 1987 balances cited earlier. If you qualify for the penalty exception, then keep the 401k plan, but if you do not, then do the direct IRA rollover. A direct rollover avoids withholding.
There is yet another option. If your plan holds highly appreciated employer stock shares, you can consider using NUA (net unrealized appreciation). You would pay taxes only on the cost basis when the shares were purchased in the plan, with all the gains taxed at the much lower LT cap gain rate. The company shares would go into a taxable account and the rest of the 401k would be directly rolled into an IRA. You could still set up a SEPP from the IRA if you needed to, but selling the company shares would produce a much lower tax bill.
Trying to piece together all these options is complex and warrants professional advice.
2009-06-25 02:56, By: Alan S., IP: [22.214.171.124]
L3: Withdraw after tax contributions before starting the SEPP?Thanks for the advice. The after tax money is all after 1987 so I see now that won’t work. I have also spoken to the 401K holder and they assure me they can handle the SEPP payments but also recommended the direct rollover to an IRA to allow for more flexibility. On the employer stock, not sure where I stand with this but I will check.
Along with my 401K from my former employer, I also have my lump sum pension that is being distributed. I had thought about rolling this into the 401K just for my ease but this may not be the way to go either as the mutiple IRA’s makes a lot of sense.
This all happened suddenly so I am playing catch up with all this. As I am not 55 yet, setting up the SEPP seems the only way I have found to avoid the extra 10% tax. If I wait until age 55, can I avoid the SEPP route altogether?
As I have taken this as far as I can on my own, I am contacting some professionals today and hopefully will have this all sorted out soon.
Thanks much for the detailed response.
Len2009-06-25 13:13, By: Len, IP: [126.96.36.199]
L4: Withdraw after tax contributions before starting the SEPP?Len:
For clarification, the age 55 rule requires you to separatefrom the company during the year you turn age 55. If youwill be55 next year, but you separate from the company this year while you are 54, then you don’t qualify for this exception. I’m not sure but from your post it sounds like you have already separated. You can’t separate from the company at age 54 and wait until the next year when you will be 55 to start taking distributions without the early withdrawal penalty.
Eventhough your current company’s K-plan allows SEPP distributions, youface two problems that should drive you to the IRA Rollover option.
1. You are stuck with the few investment options offered by the company, and can only be canged at the whims of the company.
2. Companies have a habit of changing custodians for various reasons. The current custodian may allow SEPP distributions but nothing will require a successor custodian to continue this practice.
Taking a lump-sum distribution of your pension plan may not be your best option. This will be a steady income stream for you. If you take the annuity option you will be faced with opting in or out of the Survivor Benefit Plan (SBP)which cuts down your monthly distribution amount. SBP is nothing but an insurance policy which will pay some monthly amount to your beneficiary if you die early. Compare the SBP benefits and cost to the option of purchasing an individual insurance policy on yourself for the same or greater benefit. Historically this has only worked in about 25% of the cases, but changes in insurance design and premiums over the last 15 years has increased this percentage substantially. It will depend on your health, but even some substandard cases are turning out to be a better deal than the company SBP. If the insurance option works, you and your family will have many more good options than the company SBP so check this out really good.
I will assume the advisor you will meet with can handle both investments and life insurance. Ifhe / she can only handle investmentsthen be aware thatyou may be pressured to do the lump-sum distribution of your pension and will focus only on the investment side of planning. If this advisor is only an insurance agent, cancel the appointment and find another adivsor because they are really limited in what they can offer, and you will not get the best deal for yourself and your family. Take you spouse to the meeting(s), take copious notes and then go home for a frank discussion before making any decisions.
Good luck and I hope this helps.
Jim2009-06-25 14:17, By: Jim, IP: [188.8.131.52]
L5: Withdraw after tax contributions before starting the SEPP?OOPS! One more point since you did ask about withdrawing your “after-tax contributions.”
If you do the IRA Rollover, you will have the option to either include or exclude this money along with the “pre-tax contributions.” If youinclude this moneythen you will have to deal with IRS Form 8606 to calculate the exclusion percentage when you do start making withdrawals. This is not a big deal to accomplish.
The other option is to receive a separate check, payable to you for all of the after-tax contributions which are penalty and income tax free, andtransfer the remainder from the K-plan to the Rollover IRA. This amount, along with the pension distributions, may allow you to avoid starting a SEPP Plan and can simply allow your Rollover IRA to grow for future use.
Jim2009-06-25 14:36, By: Jim, IP: [184.108.40.206]
L6: Withdraw after tax contributions before starting the SEPP?These last 2 postings are correct. I couldn’t have said it better, and can’t even add anything.2009-06-25 15:58, By: dlzallestaxes, IP: [220.127.116.11]
L7: Withdraw after tax contributions before starting the SEPP?Thank you all for your answers, this helps my understanding immensly. All of this will keep me safe, I will rely on the professionals to guide me!2009-06-25 17:22, By: Len, IP: [18.104.22.168]