withdrawing contributions from 401(a) plan
L1: withdrawing contributions from 401(a) planI plan to retire at age 54. I have a 401(a) retirement plan that I can withdraw my own contributions upon retirement, roll over into an IRA or leave in the retirement fund for a later date. I understand that I can access these funds immediately using the rule 72(t) SEPP and not suffer the 10% penalty if placed into an IRA. My questions is if I do notwithdraw these funds immediately upon retirement at age 54 but wait to withdraw at age 55, do I even need to use 72 (t) to start accessing the funds? Any thoughts?2011-05-19 12:26, By: jls, IP: [188.8.131.52]
L2: withdrawing contributions from 401(a) planIf youterminate employment in the year that you reach age 55 and the plan holding the assets allows periodic withdrawals, there should be no 10% penalty.
However, if you terminate employmentbefore age 55 or if you roll the plan assets into an IRA (anytime prior to your actual age of 59.5), you would need a SEPP to avoid the 10% penalty on any distributions.2011-05-19 13:03, By: Gfw, IP: [184.108.40.206]
L3: withdrawing contributions from 401(a) planCLARIFICATION :
If you “separate from service” with your employer, there is no need for you to roll over your 401-Kany time during the year that you are or will become 55 or older, and if your employer allows partial withdrawals, then there is no 10% penalty for distributions from your 401-K. So, what is your date of birth.
As gfw stated, if you roll over your 401-K to an IRA, then this rule no longer applies, and you have to wait until 59 1/2 to avaoid the 10% penalty for early withdrawals from your IRA, unless you set up a SEPP 72-T for your IRA.2011-05-19 13:36, By: dlzallestaxes, IP: [220.127.116.11]
L4: withdrawing contributions from 401(a) planThank you all for the advise.Iwas born in 11/58 and plan on retiring in 04/2012. The plan is a 401(a) defined benefit plan thatI have contributed 6% of my salary. I can start taking a monthly check from the plan without a penalty andwithdraw my contributions upon my retirement in 04/2012. I just do not know the best course of action for the lump sum that I will withdraw. It sounds like that if I defer taking the lump sum until age 55, I still cannot touch it without a 10% penalty unless rolled into IRA and SEPP usedbecause the age at separtion is the determining factor.2011-05-19 14:05, By: jls, IP: [18.104.22.168]
L5: withdrawing contributions from 401(a) planYes, that is correct. Since you were born in 1958, the earliest you can separate from service and still take a penalty exempt distribution directly from the plan is January, 2013. That would mean working 9 months longer.
But if the plan did not allow you to take non annuitized periodic distributions (eg they required a lump sum distribution), there is no benefit to waiting because even though you would escape the penalty you would have to your tax bracket inflated from having 5 years of living expenses taxable in a single year. Therefore, you check on the distribution options if you are considering working 9 months longer.
Under the stated conditions, you would most likely need a SEPP. You would retire, then do a direct rollover of the plan balance to a TIRA and start planning for your 72t plan to begin. No matter when you start your plan in 2012, you can take out a full annual distribution OR a pro rated amount per the month of your first 72t distribution. You might want to consider pro rating since you will also have 3 or 4 months salary taxable in 2012, perhaps some unused vacation pay etc.
You also probably have a choice of a life or joint life annuity option instead of a lump sum. While the inflexibility of this is not what most people desire, you should at least look at the numbers. Just remember that SS is also a life annuity with a COLA, so if you will have generated a good SS benefit perhaps from waiting beyond 62 to file, you may not need any more annuitized payments. 2011-05-19 20:16, By: Alan S., IP: [22.214.171.124]
L6: withdrawing contributions from 401(a) planThank you. I have the option of leaving my contributions in the plan and getting a larger monthly pension for life, but the present value of the account decreases every month depleting the amount of my 32 years of contributions first. Once the present value goes to zero, my pension continues but there is no beneficiary amount.I can roll over my contributions into my457 Deferred Comp plan without a 10% penalty but there again I cannot touch it without the 10% penalty until age 59-1/2. I will probablyretire as planned in 4/2012, receive the lower monthly pension, roll my contributions into a TIRA, start a SEPP,and live penalty free. My SS will be at the maximum level and I’ll wait until age 62 to see whether it is the best to start taking it or wait.Iwill have an unusedleave balance that I plan on rolling into my deferred comp plan that I can access right away as they somehow separate my deferred income and unused leave contributions from the potential lump sum withdrawl from the thepension account. I know my “problem” is a good one to have but I just do not want to pay Uncle Sam more thanI must. From reading the various posts here, it sounds like Schwab generatesa 1099 that the IRSis less likely to questionthe SEPP distributions since they code the 1099 with a 2 rather than a 1 as does Fidelity where my present non deductible TIRA resides. Any thoughts? Thank you, again.I am glad I found this site.2011-05-19 23:38, By: jls, IP: [126.96.36.199]
L7: withdrawing contributions from 401(a) planGenerally, I agree with your conclusions, but cannot comment on your pension plan, as I am not familiar with that particular structure. Sounds like one of the newer hybrid cash balance plans.
Re SS – don’t see it at the max, but probably close to it. Even if you will have the 35 years of contributions, if any of them were not at the FICA max for that year, you would not be at the max. Also, since the annual max amount increases every year, if you replace one of your former 35 year amounts with a more recent full annual amount, your max benefit will be higher regardless of the age you start benefits. Still, you are probably reasonably close to the max and your prior earnings are increased by an inflation amount every year until you age 60.2011-05-20 22:30, By: Alan S., IP: [188.8.131.52]
L8: withdrawing contributions from 401(a) planCLARIFICATION RE SS BENEFITS The 35 highest years of “earnings” is not an absolute figure, but rather one whereby the older years are “weighted” by a factor under the SS “PIA” formula. For example, to replace a maximum earnings of $ 4,800 35 years ago, you might need $ 50,000 in current earnings.
Also, were YOUR contributions pre-tax or after tax ? If after tax, then you would want to take it as a separate tax-free distribution, and NOT roll it over to a traditional IRA. If it was pre-tax, then a roll over is the right approach.
If you have ever made “non-deductible” IRA contributions, however, then the rollover will have a significant negative effect on the non-taxable ratio on future distributions.2011-05-21 21:06, By: dlzallestaxes, IP: [184.108.40.206]
L9: withdrawing contributions from 401(a) planI have not Paid Fed taxes on my contributions. Yes, I have made non deductible contributions into an IRA since I have a retirement plan I cannot deduct it, correct?. Would it be best to keep this IRA separate from the one thatI plan on rolling my lump sum into and do two SEPP’s? Thanks,2011-05-23 15:49, By: jls, IP: [220.127.116.11]
L10: withdrawing contributions from 401(a) planFor purposes of deductible and non-deductible contrributions all IRA accounts are considered 1 IRA account.
Part of each distribution would be taxable and part would be non-taxable.2011-05-23 15:58, By: Gfw, IP: [18.104.22.168]
L8: withdrawing contributions from 401(a) planThank you for the info. I was never clear on how the SS was determined. I always thought it was calculated on the three highest years of income. I just hope SS is still around 10 years from now.
I have one follow up question on the SEPP. Can you set it up to recalculate on a annual basis since I think interest rates will be going up soon? And once you start the annual recalculation, must you continue the recalculation even if the payment was going down in case the rates fall? Thanks2011-05-23 15:40, By: jls, IP: [22.214.171.124]
L9: withdrawing contributions from 401(a) planCan you set it up to recalculate on a annual basisYes. Bust make sure that you know what you are doing – it makes the plan more complicated.
must you continue the recalculation even if the payment was going down in case the rates fall?Yes.2011-05-23 16:00, By: Gfw, IP: [126.96.36.199]
L9: withdrawing contributions from 401(a) planYes, the IRS has approved annually recalculated 72t plans. You must recalculate using the same date every year and should stick to a 1/1 effective date. For example, you could use the 12/31 account balance and the highest 120 mid term rate for either November or December and stick to those dates every year.
The risks of electing recalculation are:
1) The IRS will probably think you busted your plan or changed to RMD, and you might possibly run into this inquiry every single year since the IRS probably does not havea way to flag the file for your future returns. They will probably ask for complete documentation of your calculations. You CAN still make the one time switch to RMD if you want to, but there is no reason to do that as long as you are looking to increase your future annual distribution amount.
2) Interest rate can move in unexpected directions, and if it drops you MUST use it anyway resulting in a possible reduction in your annual payout. I would recommend sticking with an individual life expectancy (rather than joint).
3) You MUST make a new calculation every year, so if your plan will run 6 years, there is 6 times the chance of making an error over that period.
Therefore, I would hesitate to recalculate your plan unless you think the benefits trump the risks.
SS will still be around. Worse case scenario is that current benefits would drop around 30% in 25 years if the fund had to rely only on projected current taxes. There is also some talk about changing the COLA to further restrict the already inadequate COLA compared to inflation for seniors. But Congress is almost sure to shore up the program through increased retirement ages or higher SS taxes such that any reductions will be very modest for those already in their 50s.
2011-05-23 16:10, By: Alan S., IP: [188.8.131.52]
L10: withdrawing contributions from 401(a) planHow much did you make in non-deductible contributions in total over the years ?
What is the value of the non-deductible IRA account as of 12/31/2010, and now?Is itseparate from any Deductible Traditional IRA account (not that it matters) ? If so, what is the total value of that account as of 12/31/2010, and now?
Did you file form 8606 with the tax returns for those years ?
Do you have copies of the front page of the 1040 tax return for each of those years to document that you did not take a deduction on those tax returns ?
Do you have documentation of the contributions that you made to an IRA in each of those years from a broker or mutual fund, or financial institution ?2011-05-23 17:50, By: dlzallestaxes, IP: [184.108.40.206]
L10: withdrawing contributions from 401(a) planThank you again for all your help. I agree with you that any alteration could signal the IRS and who needs that every year. I’ll go with theone time calculation.
In the event of a question from the IRS what do you show them? Thevariables inputted into the formula on this site? Thanks,2011-05-25 15:59, By: jls, IP: [220.127.116.11]
L11: withdrawing contributions from 401(a) planHere is an excellent documentation form off this site:
That said, there are times when giving the IRS much more than they ask for can result in more questions and IRS confusion. If the IRS specifically asks for your calculation, this form is very good, but if all they do is bill you for 10%, then you might just start with sending them a copy of your 5329 claiming the exception. Note that the IRS has not prescribed any particular form or format for documenting calculations.
An example of what could triggera string of inquirieswould be if your calculation was totally correct, but the IRA account shown on your original documentation is not the one shown on the 1099R, possibly because you transferred it to another custodian. That would dredge up the whole issue of partial transfers, full transfers, etc. In the end you would probably be OK, but sometimes it is best to provide only the basics, and no more than what the IRS asks for.
2011-05-25 19:23, By: Alan S., IP: [18.104.22.168]