Age 55 Separation From Service
Hi Alan,
I have a client who turns 53 in May, and will be retiring in the next few weeks. He has a substantial ESOP that he will be eligible to diversify at 55 (in this case 56 because he turns 55 right after the company’s fiscal year end). He has savings and deferred compensation to get him through the next three years. The original plan was to roll his 25% diversification to two IRAs and take withdrawals; some through ESPP/72(t), some subject to the 10% penalty. He’s on very good terms with the company he is retiring from. I’m wondering… if he were reemployed there for a period of time during which he turned 55, would that qualify him to take his ESOP payout directly (avoid the rollover) if he left the company again after 55 but before receiving any disbursement, and avoid the 10% penalty? If so, how long would he need to be reemployed? Also, is this cheating? 😉
Thanks for your help!
Josh
Permalink Submitted by Alan - IRA critic on Thu, 2017-03-16 03:42
Yes, as soon as he would be considered re employed, his next separation from service would trigger the penalty exception and the employer should code the 1099R with Code 2. If they don’t the client could claim the exception by filing Form 5329 and entering the proper exception code. This would also comprise separation from service as a triggering event for NUA using the ESOP shares as long as a qualified LSD is completed. With these options he should be able to avoid a risky 72t plan. There is nothing improper about this, but his employer may not be happy if they re hire him in good faith and he only works a month before leaving. He could also roll his IRAs back into the plan if they will accept IRA rollovers, and those funds would also qualify for the penalty exception. One caveat would be the plan’s distribution options after final separation. They have to offer a lump sum distribution, but do not have to offer flexible annual distributions. So if he has to take out 3 years of living expenses in a single year, his marginal tax rate might spike in that year.