401k/IRA questions

[SirFrugal]

So first question...it is my understanding with 401ks that if you own company stock, you can opt to have the dividend paid directly to you rather than reinvested, and you pay income tax rates on it with no age penalty.  Now...if you retire early do you retain this benefit?  Basically the situation is I work for a large utility company and will end up with a decent chunk of company stock in my 401k...so the plan is in early retirement if the extra income was needed beyond my post tax brokerage dividends, I could simply redirect my 401k dividends from reinvesting to pay directly to me, and it would be taxable as income and would be taxed at a very low rate as my income would be low.  My retirement income will mainly be dividend income in a post tax brokerage account, and ideally I'd have enough to just let the 401k keep compounding, but would the 401k dividend pay outs from company stock be a viable backup source of income or would they get hit with the 10% early withdrawal penalty if I retired prior to 55?

Second question...is an IRA worth it?  I make too much for a roth or a traditional IRA deduction.  Other income sources post 55 will be a small pension(31k dollars a year, but I got 33 years to go to collect it), an annuity(not sure on the pay out it depends on how long I work and what period of time I opt to collect it over), SS, a 401k balance that will probably be 1m+ that will have to get withdrawn eventually, and the possibility of a few apartments worth of rental income and/or a part time job just for something to do.  So basically I'm not getting any tax benefits today for putting money into an IRA, its locking my money into a position where I have to deal with withdrawal rules, and it may ultimately end up getting withdrawn at a fairly high rate anyhow since I will have several other streams of retirement income.  Should I just ignore the IRA and put the money in my post tax brokerage instead, or is there something I'm overlooking here?

[Cathy]

In the US, drafters of legislation frequently append a letter to the end of a section identifier when they want to insert a new provision between two existing consecutively-numbered provisions. By way of example, consider the Heroes Earnings Assistance and Relief Tax Act of 2008, PL 110–245, § 301(a). This statute created the current iteration of the much-feared and largely-misunderstood expatriation tax by amending the Internal Revenue Code to insert a new section numbered "877A".

The reason for this designation is that the provision topically related to the extant § 877, but Congress didn't want to re-number every provision after that in order to fit in another one (which would also make older court decisions harder to follow); instead, the legislators inserted § 877A in between §§ 877 and 878. In Canada and some US states, the convention is to use decimal places for this purpose instead. In a piece of Canadian legislation, the provision above might have been numbered "877.1".

26 USC § 401(a) provides that a trust created by an "employer for the exclusive benefit of his employees" constitutes a "qualified trust" if certain conditions are satisfied. Such a "qualified trust" enjoys certain tax benefits under the statute. 26 USC § 401(k) provides that the mere fact that "the plan includes a qualified cash or deferred arrangement" does not disqualify the trust associated therewith from being a "qualified trust".

In contrast to § 877A, there is no section of the Internal Revenue Code numbered "401k". It does not exist.

I'll let somebody else answer your questions; this is just some informational trivia for everybody's benefit. I thought some people might find it interesting why some section names contain letters while others do not.

[kkbmustang]

In the US, drafters of legislation frequently append a letter to the end of a section identifier when they want to insert a new provision between two existing consecutively-numbered provisions. By way of example, consider the Heroes Earnings Assistance and Relief Tax Act of 2008, PL 110–245, § 301(a). This statute created the current iteration of the much-feared and largely-misunderstood expatriation tax by amending the Internal Revenue Code to insert a new section numbered "877A".

The reason for this designation is that the provision topically related to the extant § 877, but Congress didn't want to re-number every provision after that in order to fit in another one (which would also make older court decisions harder to follow); instead, the legislators inserted § 877A in between §§ 877 and 878. In Canada and some US states, the convention is to use decimal places for this purpose instead. In a piece of Canadian legislation, the provision above might have been numbered "877.1".

26 USC § 401(a) provides that a trust created by an "employer for the exclusive benefit of his employees" constitutes a "qualified trust" if certain conditions are satisfied. Such a "qualified trust" enjoys certain tax benefits under the statute. 26 USC § 401(k) provides that the mere fact that "the plan includes a qualified cash or deferred arrangement" does not disqualify the trust associated therewith from being a "qualified trust".

In contrast to § 877A, there is no section of the Internal Revenue Code numbered "401k". It does not exist.

I'll let somebody else answer your questions; this is just some informational trivia for everybody's benefit. I thought some people might find it interesting why some section names contain letters while others do not.

There is a section of the Internal Revenue Code specifically related to 401k, but it's actually section 401(k). So, it's subsection (k) to Code section 401. That subsection addresses the pre-tax elective deferral. Section 401(m) addresses preferential tax treatment for matching contributions.

[Cathy]

kkbmustang, thank you for paraphrasing the third paragraph of my post above in a simpler way. My writing here can sometimes be overly complicated.

[grantmeaname]

So first question...it is my understanding with 401ks that if you own company stock, you can opt to have the dividend paid directly to you rather than reinvested, and you pay income tax rates on it with no age penalty.  Now...if you retire early do you retain this benefit?  Basically the situation is I work for a large utility company and will end up with a decent chunk of company stock in my 401k...so the plan is in early retirement if the extra income was needed beyond my post tax brokerage dividends, I could simply redirect my 401k dividends from reinvesting to pay directly to me, and it would be taxable as income and would be taxed at a very low rate as my income would be low.  My retirement income will mainly be dividend income in a post tax brokerage account, and ideally I'd have enough to just let the 401k keep compounding, but would the 401k dividend pay outs from company stock be a viable backup source of income or would they get hit with the 10% early withdrawal penalty if I retired prior to 55?

I have no idea - I've never heard of this provision before. If you posted a source or citation for it I'd do a bit of digging, though.

Second question...is an IRA worth it?  I make too much for a roth or a traditional IRA deduction.  Other income sources post 55 will be a small pension(31k dollars a year, but I got 33 years to go to collect it), an annuity(not sure on the pay out it depends on how long I work and what period of time I opt to collect it over), SS, a 401k balance that will probably be 1m+ that will have to get withdrawn eventually, and the possibility of a few apartments worth of rental income and/or a part time job just for something to do.  So basically I'm not getting any tax benefits today for putting money into an IRA, its locking my money into a position where I have to deal with withdrawal rules, and it may ultimately end up getting withdrawn at a fairly high rate anyhow since I will have several other streams of retirement income.  Should I just ignore the IRA and put the money in my post tax brokerage instead, or is there something I'm overlooking here?

Have you considered the backdoor Roth, for which there are no income limits?

[MDM]

I have no idea - I've never heard of this provision before. If you posted a source or citation for it I'd do a bit of digging, though.

Appears to fall under Employee Stock Ownership Plan (ESOP) rules instead of 401k rules (although the stock is part of the 401k): http://finance.zacks.com/401k-dividends-paid-7803.html.

[kkbmustang]

I have no idea - I've never heard of this provision before. If you posted a source or citation for it I'd do a bit of digging, though.

Appears to fall under Employee Stock Ownership Plan (ESOP) rules instead of 401k rules (although the stock is part of the 401k): http://finance.zacks.com/401k-dividends-paid-7803.html.

The ESOP is a very specific type of plan, that is required to meet specific requirements and has special provisions tied to it. So, if your plan is a plain 401(k) plan that allows you to invest in employer stock, the special dividend provision DOES NOT APPLY. If your plan is what is referred to as a KSOP (i.e., a 401(k) with an ESOP), and you have employer stock as a result of the ESOP feature, then the special dividend provisions WILL apply. This is a very important distinction.

Another distinction: Is the ESOP sponsored by a C corporation or an S corporation? If C corporation, the special dividend distribution provision applies. If an S corporation, it DOES NOT apply.

For people that want to dig into the tax stuff, here you go:

Internal Revenue Code provisions that apply here:
Employer Deduction: 404(k)(2)(A) and 404(k)(4)(A)
Employee Tax Treatment: 72(t)(2)(A)(vi)
Exceptions to 10% Excise Tax on early retirement plan distributions: http://www.irs.gov/pub/irs-pdf/p5036.pdf
Not eligible for tax-free rollover: Treas. Reg. §1.402(c)-2, Q&A- 4(e).

Notice 2002-2 (starts on page 285): http://www.irs.gov/pub/irs-irbs/irb02-02.pdf