72(t) distribution and rollover account

[Guest TDH]

An attorney client has sold his interest in the firm and is moving out to be a sole proprietor. ERA in partnership plan is 55 w/10 years of service; he has attained ERA. He has been receiving annual payments that qualify under 72(t) for the last 3 years. He is setting up a one person 401(k) plan that accepts rollover funds & has an ERA of 55. Game plan is to rollover 100% of his remaining balance of the firm's Plan into his new Plan & continue to take the same 72(t) payments until he has received payments for at least 5 years total and is past the age of 59 1/2. Will these actions continue to qualify for favorable tax treatment or are we putting him in a position to have to recapture taxes on prior annual distributions? THANKS!! I think we are OK, but still worried. TDH

[jevd]

If you are talking about substantially equal payments from a qualified plan, the individual must be separated from service to qualify. If the participant was not separated, you may not have qualifying withdrawals under 72(t). See below

(B) Periodic payments under qualified plans must begin after separation

Paragraph (2)(A)(iv) shall not apply to any amount paid from a trust described in section 401(a) which is exempt from tax under section 501(a) or from a contract described in section 72(e)(5)(D)(ii) unless the series of payments begins after the employee separates from service.

[Belgarath]

I agree with jevd. Absent some additional information, it doesn't sound like these ever qualified in the first place. So it sounds like there's going to be a "recapture" of the applicable penalties. However, if he has now attained age 55 and separated from service, he should now be able to receive a distribution just paying normal income tax with no premature distribution penalty.