Early retire at 55 and using lump sum
If you retire at 55 and take the pension as a lump sum rollover to IRA, can you ad hoc withdrawal from the IRA without SEPP?
If you retire at 55 and take the pension as a lump sum rollover to IRA, can you ad hoc withdrawal from the IRA without SEPP?
Permalink Submitted by Shane Pedersen on Thu, 2011-04-07 16:34
In this situation, the age 55 rule that would otherwise allow for a penalty free distribution is vacated once the money leaves the qualified plan and is rolled over to an IRA. A distribution could still be taken from the IRA, but the 10% penalty would apply.
Permalink Submitted by Alan Spross on Thu, 2011-04-07 17:34
The planning process in this situation should proceed in this order:
1) Determine the degree of flexibility offered by the plan for direct distributions. Periodic set distributions with at least an annual readjustment should be sufficient to make direct penalty free distributions preferable to establishing a SEPP after a direct rollover to an IRA. Large lump sums may inflate the marginal tax rate more even more than what the 10% penalty would have done.
2) If the above is not flexible enough, then Plan B is to do the direct rollover and establish a SEPP plan.
3) If the plan holds highly appreciated employer shares, an LSD is required to qualify for NUA use. The shares could be distributed to a taxable account and the rest to an IRA in a direct rollover. Selling the shares may proceed enough income to avoid a SEPP from the IRA, or at least allow the IRA to be partitioned into two IRA accounts with one of them used for the SEPP. The balance could be smaller for the SEPP IRA due to the supplemental income from selling the NUA shares. Annual taxes would also be less using the LT cap gain rates on the NUA.