Douglas,
Good imaginative thinking, but this won’t work. The problem is that none of the approved methods for a 72t would provide an annual payment anywhere near 50% of the account balance per year. All the approved methods use the combination of an interest rate with a max rate of 120% of the fed mid term rate and a mortality table that reflects the taxpayers life expectancy or joint expectancy with the beneficiary. Since no one would do a 72t much over the age of your client, they will all have a 20 plus life expectancy, and the max interest rate is only a little over 5%. The result is that the max annual distribution would be well under 10% of the account balance. The only way to bankrupt the account is to have a disastrous investment result.

If this client separated from an employer in the year he turned 55 or later, any distributions from a qualified plan are penalty free. Perhaps he has a plan that qualifies. Since he only needs two years, even if the plan requires a lump sum, he could take the amount he needs and transfer the rest to a TIRA.

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Yes, if client qualifies for the age 55 exception to the early withdrawal penalty, then a 72t with all it’s formalities can usually be avoided. For this to work, the 401k plan typically must offer installments or other flexible non lump sum distributions to prevent too much taxable income in a single year form inflating his tax bracket. But it becomes easier if the client only has 2 years left to age 59.5, because even if he has to take a lump sum it’s only two years worth, not 5 or 6. Therefore, the steps are:
1) Make sure he qualifies – he must have separated from service from the company with the plan in the year he reaches 55 or later. If this is happening now, he would qualify since he is 57.
2) See what options the plan has – ideally, if they would pay him quarterly until he is 59.5, the penalty is avoided, his taxable income is level, and he can transfer the remainder to an IRA at age 59.5 when the IRA penalty also disappears. TIRA = traditional IRA.

However, he may have yet another option if he has been with the company for a long time. That would be NUA (net unrealized appreciation) of employer stock. If he gets a cost basis quote per share and it is low (eg less than 30% of value), he could transfer the company shares to a taxable account. He pays ordinary income tax on the cost basis only, and can sell the shares in the taxable account and pay the much lower LT cap gain rate on the gains. The kicker is that the entire plan must be distributed in a single year (a qualified lump sum distribution) for this. He does not have to use all the employer shares for NUA, he could just take enough in NUA form to finance his costs till 59.5.

Depending on how this all breaks down, he could just get installments till 59.5 and forget the NUA until he turns 59.5, then do the lump sum distribution and transfer the shares to a taxable account then and the rest of the 401k to a TIRA. Age 59.5 is another triggering event that lets him utilize NUA in that year.

In summary, the simple solution is without the NUA, just taking installments from the plan for 2 years. However, if he has NUA potential as well, it could be incorporated into a plan that would lower his tax bill considerably due to the LT cap gain rate break. A full breakdown of his employer share cost basis, and his expenses for the two years would have to be done.

Either way, the 72t is avoided, and you should try to avoid it because it must last 5 years and the amounts distributed must be exact or he would owe penalties and interest on the first two years distributions.

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He might have various options with the pension buy out. One would be a lump sum he could directly transfer to an IRA. He might also have the option of a life annuity, but the plan should be advising him in writing what his options are.

A 50% cost basis is normally too high to be worth NUA consideration unless he needs to cash out the full amount. In that case, the LT cap gain on 50% would save him taxes on that 50%.

b.) Yes, check if they would pay him periodically until he is 59.5 and then he can do the IRA transfer. It would be best to avoid a lump sum distribution that would all be taxable in a single year.

c) The above would not be a loan, but taxable payments of part of his plan assets. Since they would be eligible rollover distributions, the mandatory 20% withholding would apply.

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Yes, the remaining 60,000 would still qualify for the penalty exception since it is being distributed directly from the plan.

This is true whether the 60,000 is paid as a lump sum or the plan allows installment payout. Installment payouts allow for the distributions to be made in a tax year where taxable income is lower due to being spread over more years.

Any NUA potential would be postponed under the above plan, but still not totally eliminated. If there are still employer shares with a higher value in the plan in the year he hits 59.5, he could still tap any NUA potential then. Of course, if most of the 60,000 left in the plan is employer stock and it tanks, then he would not have enough to get to 59.5 without tapping the IRA. Diversification should always trump NUA in a trade off.

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Yes, pasted below:

>>>>> >>>>>>>>>>>>

There is also a later section (not pasted) that states the A(v) does NOT apply to IRA distributions.
Age 55 attainment has also been defined to include the year that the employee reaches 55, not the exact birthday.

It does not matter how the payments are made, whether installments or lump sum.

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