Two questions on distributions

I have a couple of questions concerning taking distributions from a retirement plan.

If one was to take a 401k lump-sum distribution, how would 10 year averaging come into play, and is there any real benefit to using this process? That is, would I be able to come out ahead tax-wise by using this (vs paying 35% income tax)?

Second question is; Are there any special rules governing the taking of distributions between the ages of 59-1/2 and 70-1/2?

I believe that below 59-1/2 you must follow the "Substantially Equal Periodic Payments" requirements to avoid the 10% penalty, and the "Minimum Distribution" after age 70-1/2. Unable to find which rules govern between these two ages.

If you take a distribution below 70-1/2 are you required to follow the equal payments requirements, or do you just take whatever you want and report as income at standard income rates?

My understanding is that the 10 yr averaging provision was grandfathered so that only individuals who turned 50 before Jan 1, 1986 could elect that as an option.

Enigma9051,

It sounds like you are near the retirement decision.
It also sounds like you are beyond age 59.5 and not yet 70.5.

Regarding the lump sum distribution and income averaging, you must have been born before January 2, 1936 to do the income averaging. If I have your age bracketed correctly, you are too young for the income averaging. Also, you can only do the income averaging once since 1986. Here is a link with more information: http://www.irs.gov/taxtopics/tc412.html

72t distributions must last the longer of 5 years or until the account owner reaches age 59.5.

If you are between the ages of 55 and 59.5 when you leave your employer, you can take penalty free distributions from your 401k. Ask your 401k plan administrator.

Taking a distribution from a 401k after age 59.5 and before age 70.5 has no penalty.
If the money is tax deferred, then appropriate taxes would need to be paid. This would be taxed as ordinary income, line 16a and 16b of your 1040 form.
When the 401k has a mix of tax deferred and after tax money, the distribution is a pro rata share of those two types of money. The tax deferred amount would be reported on your 1040 line 16b and the entire distribution would be on line 16a.

We must take a RMD from our 401k plan by April 1 of the year after we reach age 70.5. Taking this distribution in the year after reaching age 70.5, we must also take a second RMD in that same year by December 31. EXAMPLE; you turn 70.5 in 2010. You must take your first RMD by April 1 of 2011. That would be your 2010 distribution. You must take your 2011 distribution by December 31, 2011. You need to take your annual RMD in each following year by December 31.

Ok, if you are still working for the 401k plan sponsor at and beyond age 70.5, you do not have to begin taking RMDs from the 401k until you separate from the sponsoring employer.

If your 401k plan allows, you may do a rollover of your 401k money to an IRA at any time. Keeping the money in the same type of account, tax deferred or after tax, in your IRA would not be a taxable event. Moving tax deferred money to a ROTH IRA would be a taxable event.

When your 401k has both tax deferred and after tax money, going to a ROTH IRA is a bit more comlicated and taxes would need to be paid on the tax deferred amount. That is another thread.

Enigma9051,It sounds like you are near the retirement decision.It also sounds like you are beyond age 59.5 and not yet 70.5.
62. Will probably go out at 66, depends of how much recovery I see over the next four years. (Got hit hard in real estate holdings).
Taking a distribution from a 401k after age 59.5 and before age 70.5 has no penalty.
Thank you fo you excellent response. I understand the basics, but my biggest question remains, "what governs how much can be taken"?

That is, am I restricted to taking distributions simular to those governing the under 59-1/2 crowd; I.E. required to use the minimum distribution method, or the fixed amortization method or the fixed annuitization method?

And if so, are these required to be maintained or can they be modified before the age of 70-1/2?

-Or- can one take out whatever they please without any concerns (other than the tax burden and loss of capitol)?

(IRS Form 590 is a bit vague in this area; be nice if it just stated exactly what occurs between 59-1/2 - 70-1/2). Thanks again.

My understanding is that the 10 yr averaging provision was grandfathered so that only individuals who turned 50 before Jan 1, 1986 could elect that as an option.
Ah, that's why I was having problems understanding it. Thanks.

Enigma9051,

Read your 401k Summary Plan Description. That tells you when and under what circustances you can take a distribution from the plan. The SPD will also tell you when you must take a distribution.

If you have separated from the 401k plan sponsor and are beyond age 59.5, you can take as much, or as little as you want and pay the appropriate taxes.

At age 70.5 and beyond, you must take a minimum amount based on your age at that time. You can take more than the minimum, the maximum being your account balance.

IRS Pub 590, is for IRAs. It is not for 401k plans. That being said there are many similiarities. And after you leave your employer, you can do a Rollover of your 401k money to an IRA. Generally your beneficiaries have more options when you use the IRA vs a 401k plan. You also have more investment choices in the IRA.

A 401k plan is a Qualified Plan, and IRS PUB 560, SEP, SIMPLE, and Qualified Plans may have more information that you are seeking. But this Pub is aimed more at small businesses using these plans.

Read your 401k Summary Plan Description for the information about your plan.