Taxpayer was under 55 when he lost his job. Wants to use 72t rules utilizing the amortazation method. Money is in 401K. About 500K. He wants to move $50K to IRA before starting the 72t payments from 401 K. Does that rollover mess up the equal payment rule in which case he would need to roll everything into two different IRA's and then start the 72t or is he OK to leave remaining money in 401K plan.
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Code Section 72(t)(2)(A)(iv) provides for an exception to the 10% early withdrawal penalty if distributions are part of a series of substantially equal periodic payments based on the participant’s life expectancy. If it is from an employer plan, the payments must begin after separation from service.
Your question centers on the idea that you want to keep some of the money in another IRA and only take periodic payments from one account. Can you do that, or do you have to take periodic payments based on the account balance of ALL retirement accounts?
The answer is you don’t have to take periodic payments based on the account balance from all accounts.
IRS Letter Ruling 200122048 presents a somewhat similar scenario, where the taxpayer rolled all of his 401(k) money into IRA – A, and then later rolled some from IRA – A into new IRA – B, which was established solely for the purposes of receiving periodic payments.
The calculation used to determine the amount of the periodic payments was based solely on the account balance in IRA – B. The account balance in IRA – A was not used in the calculation, nor was any money distributed from IRA – A. The IRS ruled this to be proper, and the distributions from IRA – B were not subject to the 10% penalty.
Even though this is not exactly the same as your situation, it is the same principal. As long as the distributions from the 401(k) begin after the employee separated from service, and the distributions are based on the entire account balance of the account that the money is being distributed fund, then you should be OK.
If you are still unsure about this working, you could structure it the way the taxpayer in this letter ruling did. Roll all of the money from the 401(k) into an IRA, and then roll some of it into a second IRA in which you will be taking the periodic distributions. -
72t
I went through this with a client and Bees Knees is right on target here. Just have what you want to do a 72t on, separated in it's own IRA account.Comment
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