401K 72T SEPP and dividends

Submitted by Tommy Strate on Thu, 2017-02-02 19:13

My 401K plan allows for me to receive company stock dividend payments without incurring the 10% penalty.  These distributions are coded with box 7 dist code “U” on my 1099R.   If I start a SEPP on this 401K account, can I continue to receive these dividends?  Or will the dividend disbursement be considered a bust?  I assume SEPP distributions will be coded with a “1” for me at age 56.  I left employment before the year in which I turned 55 and I have minimal NUA.  I realize I can rollover the 401K to my IRA but that would require me to rollover most all the balance and forego the dividends. 



Submitted by Alan - IRA critic on Thu, 2017-02-02 20:58

  • Executing a SEPP from a 401k is always more risky than from an IRA because of lack of taxpayer control over the plan. If you want to use the 401k plan and you have only been separated for less than a year, something like an excess contribution, annual addition, or excess deferral could bust the plan. Like those situations, these dividends will be reported on a separate 1099R due to the U coding, but all IRS examiners may not look at these as separate distributions from the SEPP distribution. What plan shows as issuer on the 1099R forms you received in the past? If it shows the ESOP for the dividends and the 401k 1099R reporting SEPP distributions will show the 401k as issuer, that definitely helps.
  • If you did an IRA rollover, do you have to sell the ESOP shares back to the plan, or can you roll them over to the IRA? What dividend amount would those shares pay thereafter compared to what you are getting now?


Submitted by Tommy Strate on Thu, 2017-02-02 23:38

I can make it work by rolling over enough cash from the 401K to my IRA (without having to sell shares and continue to collect dividends on my 401K stock) and still get the 72t cash flow I desire from the separate IRA.  My issuer would be the same, it is not two plans, i just hold company stock inside the 401K.  Thanks for your help.



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