how to calculate SEPP for Lump Sum being paid over 5 years (60 payments)
Here is our dilemma….husband is 55, wants to retire at 55 (basically now). We can get lump sum pension paid out over 5 years certain and have a 401K. Most of our money is tied up in these two shelters. Our problem is how best to use these two funding sources to live on for the next 4-5 years and also hopefully avoid 10% penalty on withdrawals. We wanted to use 401K funds (rolled over into an IRA) to live off for the first 6-8 years not touching pension funds at all (but spending about 70% of the 401K funds). The plan was to leave pension to grow to ensure a funding stream down the road. 72T against the 401K amount in an IRA doesn’t work since it only allows a portion of the 401K to be distributed (SEPP based on LE calculations works out to be only about 30% of what we need) because it treats the 401K as the only source of retirment funds(but this is not the case). We are thinking about combining the lump sum pension and 401K into a single IRA but it will be changing every month for 60 months so how do I use 72T and calculate SEPP if I combine these two buckets of funds? If we combine the total pension and the 401K, SEPP calculations are more than we need. Can SEPP payments be calculated on the “anticipated” but certain total payout (from Trust held in Mellon Bank into IRA set up with some financial management account)?
Permalink Submitted by Alan - IRA critic on Fri, 2013-06-07 17:34
A SEPP could not be set up involving the 60 month pension payout, but a SEPP is not needed here. The age 55 separation from service penalty exception will apply, meaning that husband could request a check annually for needed expenses and have the rest of the 12 month payout directly rolled into an IRA. This avoids the rigid requirements of a SEPP and the potential costs of busting the plan before it terminates. If the pension can only be paid out monthly for the 60 months, one or more months would have to be paid to the husband, and the rest of the payments directly rolled to an IRA to avoid mandatory withholding. If the plan cannot provide this flexibility, the options that are available should be analyzed to determine the best one.