stock in a 401k plan
client has 97% stock in his 401k, left his previous employer 5 years ago. he is now age 50. he is getting quarterly “dividens” paid to him.
my question.. is this possible? and if i roll over his 401k to and IRA is there a way to send him quarterly payments?? ie 72t some of his account to match his current quarterly payments and then put other amount into an IRA. am i on the right track?????
Permalink Submitted by Alan Spross on Wed, 2007-09-12 04:24
Partially.
The plan could first be direct transferred to a traditional IRA account. From the new IRA account the amount needed to fund a 72t distribution of the required amount should then be transferred to a second IRA and the 72t implemented from that account only. Since the 72t must last for 9 years, some careful planning is necessary to establish the correct amount.
However, since the first IRA will not be part of the 72t plan, it can be a source of emergency funds or it could also fund a second 72t plan at a later date. Amounts can never be transferred between these two IRA accounts once a 72t is established.
If the current dividends are ESOP dividends, they are already penalty free, so perhaps the plan should be left alone. And, if they are ESOP or other employer shares, perhaps client should diversify his holdings. That is more vital than the tax issues.
Permalink Submitted by Tim Martin on Thu, 2007-09-13 03:18
Tks for info.. What does ESOP stand for? However I do believe they are penalty free dividends, and yes 97% of his holdings are in one stock.
I agree he should diversify his holdings. But the client’s biggest concern is the quarterly payments. ?? What if we left enough money in 401k to continue his quarterly payments until age 59 1/2? Then at that time his 401k would be liquidated. Then roll reaming balance into a “diversified” IRA.
Thoughts ???
Permalink Submitted by Alan Spross on Thu, 2007-09-13 03:46
ESOP = Employee Stock Ownership Plan, a type of profit sharing plan that awards only employer stock shares. If the stock pays a dividend, these are usually paid in cash to employees as ordinary dividends not subject to the early withdrawal penalty. I do not know if this is the source of the dividends you refer to, but normally the amount would not exceed more than 4 or 5% of the value of the shares per year.
So you need to identify the actual source of the payments. If you remove the source from the plan, then the dividends would obviously stop and/or be treated differently. Any distributions from an IRA would be subject to penalty unless they met an exception such as a 72t plan.