ORP and 401K SEPP Before Age 55: 10% Penalty-Free?

[Mo Money]

I ran the ORP calculator and it is suggesting that, starting with the first year of my retirement (age 53 - next year), I withdraw substantially equal periodic payments (SEPP) from my 401K (TaxDef) account, so that I can then slide that money into a Roth IRA. Can this be done without a 10% penalty since I would be starting the SEPP process at 53, a couple of years prior to age 55? If I do this, ORP appears to be indicating that I will pay some tax, but it's silent on the issue of any penalty.

Any wisdom out there for this numbers-challenged novice?

 

[teejayevans]

No, but you could transfer all/some into IRA, then do a 72t withdrawls

 

[Animorph]

Are you using some of that to live on, or is it all just going to the Roth? The latter would be a pretty normal Roth conversion, if your 401k allowed it. Or simply rollover into an IRA and do it from there. No age minimum for a Roth conversion from either source.

 

[LOL!]

I don't understand the original post.

One can convert a 401(k) to a Roth IRA without a penaly and without a SEPP. One must pay income tax on any conversion of money that has not had taxes previously paid on it.

It is better to pay the taxes from a different source than the 401(k) because if one does pay the tax from the 401(k) money, then that bit of money would be withdrawal subject to both tax and penalty unless that separate bit of money to pay the tax was withdrawn via the SEPP method in which case it will still be subject to income tax, but not the penalty.

And if one does use a SEPP, it is going to have to continue beyond age 55 because of the law. I think one will not be able to withdraw from the 401(k) penalty-free if they leave employment before age-55 simply because they became 55 years old later.

And to re-iterate: withdrawal is not the same as conversion in this post.

 

[zinger1457]

To avoid the 10% penalty for early withdrawals from your 401K plan you will need to setup a 72t plan as mentioned above. You'll need to plan carefully when doing this, any mistake can be costly. Suggest you go to 72t on the Net | SEPP, 72t, and /72q Distributions for more information. Realize that when you set this up you'll have to continue making these withdrawals until your 59.5.

 

[Mo Money]

It seems like I may mistakenly be blending two concepts -- rollovers and 72t SEPPs. The ORP report has me withdrawing $ from my 401K, paying tax on the withdrawn $ (presumably on the earnings) and then rolling over the balance into a Roth IRA. ORP wants me to do the 401K withdrawals in several annual installments (once a year for 8-10 years). I think it has me doing this in installments to keep me from bumping up into a higher tax bracket.

1. Do you think I was mixing things up, as described above?
2. Can one roll over 401K $ into a Roth IRA in several once-a-year installments, with the only taxes to be paid on the gains, but with no 10% penalty?
3. If I do this, do I have to wait 5 years to use the $?
4. 5 years from when? First annual rollover, or final annual rollover?

Many thanks for your patience.

 

[LOL!]

A rollover is neither a withdrawal nor a conversion, so now I have no clue what you are writing about, but ….

2. A 401(k) can be rolled over to a traditional IRA without penalty or tax.
A 401(k) or a traditional IRA can be converted to a Roth IRA without penalty, but one will need to pay tax on ALL the money that has not been taxed before and that is usually ALL the money and not just the gains. That is, convert $100,000 of 401(k) means your adjusted gross income is $100,000 larger.

3. Do you have to wait 5 years? I don't know, but I think it might also depend on whether you already have a Roth IRA. Google it and post the answer back here for us to read please.

 

[Animorph]

It seems like I may mistakenly be blending two concepts -- rollovers and 72t SEPPs. The ORP report has me withdrawing $ from my 401K, paying tax on the withdrawn $ (presumably on the earnings) and then rolling over the balance into a Roth IRA. ORP wants me to do the 401K withdrawals in several annual installments (once a year for 8-10 years). I think it has me doing this in installments to keep me from bumping up into a higher tax bracket.

1. Do you think I was mixing things up, as described above?
2. Can one roll over 401K $ into a Roth IRA in several once-a-year installments, with the only taxes to be paid on the gains, but with no 10% penalty?
3. If I do this, do I have to wait 5 years to use the $?
4. 5 years from when? First annual rollover, or final annual rollover?

Many thanks for your patience.

1. Yeah it sounded mixed up. ORP is recommending Roth conversions (with taxes paid by taxable account funds).

2. That's a Roth conversion again. Yes, you can make partial conversions, as many times a year as you want. You normally pay taxes on the entire converted amount, not just "gains". That's because you never paid taxes on the original contributions to your 401k. The exception would be if you have after-tax contributions in there for some reason. Also, your 401k may or may not allow partial Roth conversions, depending on its own rules. You will always be able to rollover your 401k to a traditional IRA, which is not a taxable event with a little care, and then Roth convert from your traditional IRA to a Roth IRA.

3. If you are over 59.5, I don't think you need to worry about the 5 year rule. But this is a tricky area and I always look back at the IRS instructions, which I don't seem to have at hand. Roth conversion won't get your money out any earlier than normal.

4. 5 years from the start of the calendar year in which you made the conversion. A new 5 year period for each conversion, unlike the rules for normal contributions.

 

[Animorph]

IRS link for Roth IRA's, click on the "Are distributions taxable" link in the table of contents.

Publication 590 (2013), Individual Retirement Arrangements (IRAs)

Keep in mind that while "qualified" distributions are good, non-qualified distributions also have exceptions that avoid any penalties. And one of those exceptions is being over age 59.5.

 

[Mo Money]

Animorph! You are wonderful. Thanks to everyone. Why didn't I join this board five years ago?