72t SEPP

[ChrisDIY]

I retired a few years ago, and am thinking about starting a SEPP next year when I turn 55.  I intend to take these distributions from my Traditional (before tax) 401k.  I also have a Roth 401k that I would like to continue performing annual rollovers to my Roth IRA.  Both the Traditional 401k and Roth 401k are from the same employer managed by the same service provider.  The service provider has told me that they consider both 401k’s to be in the same account.  The statements show a total for both accounts, but do break out the before tax and Roth components.  Additionally, I can specify distributions from either 401k source.  The service provider has told me that any distributions from the traditional 401k source would be coded “1” in box 7 of the 1099.  In the past, distributions from Traditional 401k and rollovers from Roth 401k have unique “account numbers” for each transition on 1099’s.

My understanding is that the IRS specifies that “a designated Roth account is a separate account”.  So, despite that the service provider says the 401k’s are one account, will distributions from Roth 401k bust a SEPP from Traditional 401k?  I understand that this question could be avoided by rolling the Traditional funds into an IRA, but I prefer to keep the accounts with the same service provider.  

[dmertz]

Prior to establishing the SEPP plan under just the traditional account in the 401(k), is there some reason that you do not simply roll over to a Roth IRA the entire balance presently in the designated Roth account in the 401(k)?

[ChrisDIY]

dmertz,

Thank you for reviewing my inquiry and your follow up question.

I prefer to maximize funds in both the Traditional and Roth 401k’s with the provider because I like the trading platform and investment options.  My understanding is that trading within the 401k will not bust a SEPP like contributions or distributions (within same account) will, correct?

Additionally, I have been doing in-plan Roth conversions for several years to establish taxed “basis” in the Roth 401k.  After the 5 year re-capture period for each conversion, I roll over part of the Roth 401k (basis and earning) each year, so that I can withdraw the basis portion without tax liability.  I would discontinue the annual in-plan conversions to set up the SEPP.  The rollovers (Roth 401k to Roth IRA) that I have done show $0.00 in box 10 of 1099.  I suspect a full rollover would trigger a value in that box and I haven’t figured out the implication on subsequent IRA withdrawals.  I suspect (but haven’t fully researched) that I could roll over the entire amount in the Roth 401k and then withdraw basis on appropriate schedule to not trigger each 5 year recapture.  However, I figure it’s easier and “cleaner” to just keep rolling over on an annual basis (and keep funds maximized in preferred trading platform and investment options).