SEPP from 401k

[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 provider.  The 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 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 separate 1099’s with unique “account numbers” for each transition.

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. 

[KimberW · Accepted solution]

As long as your brokerage firm is maintaining segregated accounts (or sub-accounts) for you, then that is sufficiently "separate". It sounds like they are maintaining segregated account information for each type because you are able to specify the source of withdrawals.

But -- it does mean that the entirety of your traditional 401(k) account at this brokerage would be subject to the Series of Substantially Equal Periodic Payments (SoSEPP). You would not be able to make any other withdrawals from the traditional 401(k) during the life of the SoSEPP, nor would you be able to convert funds from your traditional 401(k) to a Roth IRA.

Distributions from your Roth 401(k), though, are not distributions from your traditional 401(k) account and would not affect your SoSEPP.

The IRS provides some question and answer details about SoSEPP plans Substantially Equal Periodic Payments and the discussion in this community post may also be helpful.

[ChrisDIY]

KimberM,

Thanks for the reply.

I understand that contributions or distributions to/from an account that has SEPP are not allowed.

Am I correct in my assumption that trades within the account are allowed (ie sell domestic stock fund and buy international stock fund)?

Chris  

[KimberW · Accepted solution]

That's correct.

From Question 2 of that same IRS Q&A (Substantially Equal Periodic Payments) -- I've added the bold

Once the SoSEPP is established, the taxpayer cannot make any additions to the account, nor take any payments from the account, other than the SoSEPP payments. Changes to the account due to investment experience do not affect this prohibition against making additional contributions to the account or taking distributions from the account in addition to the annual payment under the SoSEPP.