I am 57 ½ years old and am considering moving my retirement account (defined contribution program) into a 457 account. I want to make sure I can make withdrawals prior to 59 ½ without a penalty. I have read the following: “There are several exceptions to the 10 percent penalty, which include payments made to an employee after separation from service if the separation occurred after the employee attained the age of 55, having a qualifying disability, or receiving substantially equal periodic payments for at least five years or until you reach age 59 ½, whichever is the longer period.” I will be over 55, will be separating from service, and will take equal payments over a five-year period. It sounds like I won't be assessed the 10 percent penalty. However, the folks in the Oregon Savings Growth Program tell me I should consult a CPA to be sure. Any suggestions on how I can get a definitive answer?
You do not indicate if you are changing employers or are consolidating currently existing accounts. Based upon the information presented, it appears that the contemplated transaction can occur free of the 10 percent penalty tax on premature withdrawals.
But why do a rollover to a 457 plan at all? If a rollover is made to a 457 plan, then the funds will be subject to the rules and regulations of that particular plan. Rolling over the funds into a self-directed IRA gives the owner of the IRA complete control of the funds and the ability to modify distributions if necessary (although, if you are using a “Series of Substantially Equal Periodic Payments” (SOSEPP) to distribute funds, any modification of the payment stream in the first five years would incur penalties retroactively). If all the funds are not needed for living expenses, then creating two IRAs—one to hold funds to make the SOSEPP payments, and the other to hold the excess funds for investment or other purposes—gives the owner additional flexibility in the use of his or her funds. One downside to this strategy is a diminution in the degree of creditor protection that a qualified retirement plan provides.
Additionally, you need to make the following decisions in establishing a SOSEPP:
- Which of three permitted calculations (required minimum distribution, amortization, or annuitization) will you use?
- Which life expectancy table will you use (single, joint, or uniform)?
- What interest rate will you use (if using the amortization or annuitization method)?
- Will you use annual recalculation (if using the amortization or annuitization method)?
- Choose the account balance valuation date.
These elements require a great deal of thought and analysis to get the optimal answer for you. I think it would be wise for you to discuss this with a CPA licensed in the state of Oregon to make sure there are no state income tax implications to this transfer.
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Answered by: James D. Adelsperger, CPA, is senior wealth adviser with Domani Wealth in Lancaster, Pa.