72t distribution method
L1: 72t distribution method
To take 4% in income to live on via 72t equal distributions for 5 years from my $1M in IRAs, which computation method equalizes best to cover my costs of living with inflation over the 5 years? This will be my main source of income. Also will $1M principle last based on estimated growth of 7-8%? Right now portfolio is 85% equities, need to reduce the proportion to make it more conservative but hestitate to do so during the recovery as most equities are still at a loss.
2010-04-04 03:46, By: marceya1, IP: [76.241.142.62]
L2: 72t distribution methodMarcey,Amortization yields the highest payout, but don’t forget that the formulais based on your attained age in the year you start and the allowed maximum interest rate for the month you start, along with your IRA starting balance.At age 55 with $1Mill the Amort methodshows about $54K per year paid out using 3.39% reasonable interest rate that is now applicable. Best bet is to use the calculator on this site, to see what theannual payment will be for your situation. You can plug in the “actual interest rate” using your 7% assumed growth factorto see what happens to your balance each year factoring in the withdrawal, but it does not affect the payout per year, only the projected new balance using that growth factor. Play with it for a while and use different rates of return to see the effect on your balance. You will have to do it again for your real plan in case the starting month of your scenario passes, and a different interest rate has to be used. If you choose to stay with initial annual calculation for each year of the entire SEPP, that is what you get, so if there is inflation, you are “stuck”, but it is the safest way to go, and you know what you will get each year. If you choose to recalculate your amortization each calendar year, and you have a year when allowable interest rate is less, and/or your account balance has suffered losses, it will likely yield a lower payout for that next year than before.Theopposite may occur if you have gains and if a higher interest rate is allowed in future calculation, but that method runs the risk of you making a mistake that couldbe challenged by the IRS. We all probably used 7-8% growth in our own forecasting formulas before starting our SEPP plans, and then almost all of us got bombed by the market crashing our IRA balances almost 40-50% in some cases in 2008 and 2009, and although they are coming back, there aren’t many who have made any overall increase in their accounts in the last 3 years so I would not be that optomistic.Ken2010-04-04 04:12, By: Ken, IP: [71.192.120.143]
L3: 72t distribution methodKEN:
WOW, this is amazingly quick response as I sit here at 1 am and worry about my future. Truly appreciate your expert knowledge as brokers do not seem to know. I have used the calculators but do not totally understand the underlying assumptions. EG: They use the required interest rate and end up with a balance after 5 years that is much less than the beginning balance.
I am 57 (2/10/53), plan to begin 72 t this month, or next.
My actual portfolio growth from 2004- March 2010 was 4.5, so I get the point about projections. That is why I wanted to know if the money will hold up using a 4% distribution based on my total current portfolios $1M all combined as of March 2010.
Should I rebalance to more conservative investments right now since I am taking out funds in SEPP?
Thanks so very much. Marcia2010-04-04 05:13, By: marceya1, IP: [76.241.142.62]
L2: 72t distribution methodYour best approach is the amortization method, which I figure will produce around 54,000 per year if you are age 55 on your birthday this year. That distribution is fixed, but if you want to take out somewhat less, you can partition the IRA into two accounts of 740,000 and 260,000, and use the 740k IRA for your 72t plan. That would yield around the 40k annually you seem to want.You could opt for a recalculation plan, but that will require a new calculation each year, and any investment losses will reduce your annual payout and gains would force you to take out more than you need. I assumed you were age 55-57 since you mentioned a 5 year term for the plan, but if you are younger the plan MUST last until age 59.5 if that is longer than 5 years.For a 740k IRA, you need an investment return of 5.7% in order for you account balance to remain at 740k after 5 years of distributions. That does not include any earnings on the other 260k IRA that is NOT part of your plan, and could be used for emergency distribution needs to protect your plan.The main thing is to pad what you think you need somewhat and create your 72t IRA balance to produce that amount. That is safer than adding the risk of recalculation to your plan.You can play with options by going into the SEPP payment calculator link above and entering various investment return rates.2010-04-04 04:16, By: Alan S., IP: [24.116.165.60]
L3: 72t distribution methodAlanWOW, this is amazingly quick response as I sit here at 1 am and worry about my future. Truly appreciate your expert knowledge as brokers do not seem to know. I have used the calculators but do not totally understand the underlying assumptions. EG: They use the required interest rate and end up with a balance after 5 years that is much less than the beginning balance.
I am 57 (2/10/53), plan to begin 72 t this month, or next.
So have to see if $40000/year calculation is good for all five years, and come up with a constant amount, right?
Then use single life amortization method on $740000 IRA with maximum interest rate (3.39 from FEB 2010).
How/where in the calculation do you play with investment return rates? (Don’t really get what that 120% fed rate interest rate is used for anyway.)
Do you use an IRA balance from 12/31 or current month?
Would I have to change my current IRA allocation to be more conservative than all equities when taking distributions?
Last, is it possible to take ROTH IRA converted principle funds out penalty free using 5 year rule (what is that?) just in case? I am trying to decide whether to convert more of my TRAD IRA TO ROTH even tho my tax rate is low now and will be low in retirement as things are turning out.
Thanks so very much. Marcia2010-04-04 05:09, By: marceya1, IP: [76.241.142.62]
L4: 72t distribution methodFollowing is a link to the calculator in which I used your actual age and an investment return of 6%. You can see the results after clicking “calculate”. http://www.72t.net/SeppPaymentCalculatorIf you only need 40k, that is 71.4% of 56,000, so any IRA balance of 71.4% of your 1mm or 714,000 would generate that 40,000 you need. You can change the investment return to see how much you would have left for different rates of return.The interest rate of 3.39% is the max 120% federal rate you can use for an April plan initial distribution. You should always use the max interest rate you are allowed (3.39%), as that develops the highest dollardistribution per dollar of IRA balance. The actual investment rate you earn on the account will determine how much you have left after taking the 72t distribution, but does NOT affect your plan itself. Since that rate is a guess, you can experiment with it. If 40,000 is all you need, iefar less than 56,000, you can partition your IRA into one that is 714,000 and 286,000. The 714,000 would be the one that would fund your72t plan and generate around 40k annually. If you are partitioning the IRA into two, use the balance on a particular dayAFTER the partitioning is done,and before you order your first 72t distribution.Yes, you should change your investments to reduce the stock allocation tono more than half, but you do nothave to. The more stocks you have the greater the potential to vary considerablyfrom the interest rate you entered into the caculator.That means that your assumption of investment yield could be way off.While it is fairly rare, if you have a Roth IRA that you want to use for your plan, the distributions of conversion funds within 5 years will avoid any early distribution penalty because of the 72t plan penalty exception, which overrides the conversion 5 year holding requirement.You can convert while using a 72t plan, but I would be vary careful since you will have to pay the conversion taxes from your plan distributions. There are extra moving parts with a conversion and therefore much greater risk that you would make a critical error in execution. I don’t recommend converting during a plan due to those risks, but if you want to, be sure to triple checkhow and when the taxes will be paidon the conversion, because a conversion will accelerate taxes due from an even amount during the plan to an upfront payment followed by more tax free distributions. This change can include just too many moving parts, all of them adding risk to your plan.I suggest continuing your research until your TOTALLY understand all these variables prior to starting a 72t plan.2010-04-04 21:39, By: Alan S., IP: [24.116.165.60]
L5: 72t distribution methodALAN
Again I truly appreciate your taking the time for such a detailed explanation. I am beginning to understand these variables, and had gone on this site some months before to start this research.
Will use max interest calculation which is 3.39 now, but wait until month IRA is partitioned to check on rates for prior two months. Will choose distribution days like 5th/6th of month. Do not know how long this takes to set up, before 1st distribution will ask brokerage.
Will use regular TRAD IRA for 72t and not convert anything from it.
My question re; ROTH IRA distribution was totally separate just in case I need some lump sum, is it available before age 59.5?
Should I keep $80K in cash in portfolio in case investments are down and need to use the money?
It seems like the actual investment returned is not really entered into the SEPP calculation but need to know it to inform my decision about how much I can afford to take annually without depleting principle. If using entire IRA, clearly I could take more annually but that gives no hedge if investments are down.
Still need to estimate my annual taxes on 40k income, for now am guessing around 10% with adjustments.
Played with calculation and come up with annual payout and minimum investment interest to break even. Does this look right?
THANKS SO MUCH> Marcia
Owner’s Age: Enter your attained age of the account owner in the year that distributions will begin.
Beneficiary’s Age: Enter your attained age of the account beneficiary in the year that distributions will begin.
Method to Illustrate: Select from one of the three acceptable methods.
Total IRA Account Balance: Enter the total balance all of your IRA account(s). Used only for illustrative purposes.
Amount Allocated to SEPP: Enter the amount in the IRA account(s) that will be usen in the SEPP plan. When you decide what IRA account to allocate to the SEPP plan, then all the funds in those accounts must be used to determine the annual distribution from the SEPP.
Reasonable Interest Rate: Enter an interest rate that will be reasonable when the first payment is made for methods number two and three.
Post 12/31/2002 – For any SEPP plan the interest rate that may be used is any interest rate that is not more than 120 percent of the federal mid-term rate for either of the two months immediately preceding the month in which the distribution begins.
IRS Penalty Interest Rate: The interest rate charged by the IRS on past due income taxes and tax penalties. Used only for illustrative purposes.
Use Joint Calculations: Enter either YES or NO to use joint life expectancy calclations. To use the Uniform Table merely set the beneficiary’s age to the Owner’s age minus 10. Joint calculations are seldom useful as they will always generate a lower annual distribution.
COST to BUST: The Cost to Bust is equal to the the penalty due for the current year, all previous plan years, plus interest due.
For example, Based on a payment of $9,001.71 and an IRS Interest Rate of 9%, Year 2 would be calculated as follows:
Year1=(9001.71*.10)+(900.17*0.09)= 900.17+81.02 Year 2=(9001.71*.10) = 900.17 Total Tax & Penalty Due: =1881.36
Planning Pointer: If the single life calculations produce a higher than desired payment, consider breaking the single account into multiple accounts using only one of the accounts to produce the desired SEPP payment. Other accounts can be used for emergencies or for establishing another SEPP at a later date. Click the [Help] button again to collapse this window
Owner’s Age
20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64
Beneficiary’s Age
20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64
Method To Illustrate
Minimum Distribution Amortization Annuitization
Total IRA Account Balance
RequiredInvalid
Amount Allocated to SEPPPlan
RequiredInvalid
Reasonable Interest Rate
RequiredInvalid
Actual InvestmentRate
RequiredInvalid
IRS Penalty Interest Rate
RequiredInvalid
Use Joint Calculations
No Yes
Report to View: Table of ValuesChart
72(t) Annual Payments
27.9 Years
Life Expectancy
$25,591.40 [$2,132.62/mo]
1] Minimum Distribution Method
$39,974.67 [$3,331.22/mo]
2] Amortization Method
$39,870.45 [$3,322.54/mo]
3] Annuitization Method
Date:4/4/2010
Beginning IRA Balance$1,000,000
Allocated to SEPP$714,000
Balance of IRA$286,000
Initial Annual Payment$39,975
Elapsed Time Period5 Years
Cumulative Payments$199,873
Balance of SEPP$649,501
Balance of IRA$350,816
Remaining Account Value$1,000,317
2010-04-05 00:49, By: marceya1, IP: [76.205.75.209]
L6: 72t distribution methodYes, this looks right and uses a more conservative return of 4.17%.Note that you must partition the IRA into two IRA account before starting the plan. The “amount allocated to the SEPP plan” is there only for calculating remaining balances, but some people think it means you can allocate only part of a particular IRA account to the SEPP plan. You cannot do that, as you must use the entire IRA balance, so in your case you would have a 714,000 IRA account for the SEPP and a totally separate 286,000 IRA account outside the SEPP, that you could use for emergency needs or even to start a second SEPP plan if you needed to.If you have a Roth IRA outside your SEPP, for example if you converted part of that 286,000 IRA to a Roth, you cannot take distributions of those conversions prior to 59.5 without a 10% penalty since you will not have held them 5 years. But if you have a Roth you funded with regular contributions, you can withdraw those at any time both tax and penalty free. 2010-04-05 18:45, By: Alan S., IP: [24.116.165.60]
L7: 72t distribution methodALANNow I am confused re; partition. I need to elect to use one of my varied IRAs for SEPP and then calculate based on the total or determine how much is needed to partition first? Which figure do I put into formula first as it asks for total IRA.
EG> One of mine = 738,508. I may need to take a higher income amount now, like 48K.
Thanks.2010-04-06 03:53, By: marceya1, IP: [76.205.75.209]
L7: 72t distribution methodALANRecalculated with higher payout annually, which means investment return needs to be almost 6% to preserve principle. Calculator came up with IRA balance to begin with.
72(t) & 72(q) SEPP Calculator
SEPP Quick Links
The calculators default values are set to values that would be acceptable under Revenue Ruling 2002-62. However, be sure to verify the interest rate using the link in the menu on the left. The rate below is 120% of the mid-term assuming the plan is started in the current month.
Maximum Interest Rates for 72(t) & 72(q) SEPP Plans where the initial distribution occurs during the following time periods: 04/01/2010-04/30/2010: 3.39% | 05/01/2010-05/31/2010: 3.25% | 06/01/2010-06/30/2010: 3.25%
SEPP Calculators:Distributions/Reverse/First Modificaton Date
Help
Owner’s Age: Enter your attained age of the account owner in the year that distributions will begin.
Beneficiary’s Age: Enter your attained age of the account beneficiary in the year that distributions will begin.
Method to Illustrate: Select from one of the three acceptable methods.
Total IRA Account Balance: Enter the total balance all of your IRA account(s). Used only for illustrative purposes.
Amount Allocated to SEPP: Enter the amount in the IRA account(s) that will be usen in the SEPP plan. When you decide what IRA account to allocate to the SEPP plan, then all the funds in those accounts must be used to determine the annual distribution from the SEPP.
Reasonable Interest Rate: Enter an interest rate that will be reasonable when the first payment is made for methods number two and three.
Post 12/31/2002 – For any SEPP plan the interest rate that may be used is any interest rate that is not more than 120 percent of the federal mid-term rate for either of the two months immediately preceding the month in which the distribution begins.
IRS Penalty Interest Rate: The interest rate charged by the IRS on past due income taxes and tax penalties. Used only for illustrative purposes.
Use Joint Calculations: Enter either YES or NO to use joint life expectancy calclations. To use the Uniform Table merely set the beneficiary’s age to the Owner’s age minus 10. Joint calculations are seldom useful as they will always generate a lower annual distribution.
COST to BUST: The Cost to Bust is equal to the the penalty due for the current year, all previous plan years, plus interest due.
For example, Based on a payment of $9,001.71 and an IRS Interest Rate of 9%, Year 2 would be calculated as follows:
Year1=(9001.71*.10)+(900.17*0.09)= 900.17+81.02 Year 2=(9001.71*.10) = 900.17 Total Tax & Penalty Due: =1881.36
Planning Pointer: If the single life calculations produce a higher than desired payment, consider breaking the single account into multiple accounts using only one of the accounts to produce the desired SEPP payment. Other accounts can be used for emergencies or for establishing another SEPP at a later date. Click the [Help] button again to collapse this window
Owner’s Age
20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64
Beneficiary’s Age
20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64
Method To Illustrate
Minimum Distribution Amortization Annuitization
Total IRA Account Balance
RequiredInvalid
Amount Allocated to SEPPPlan
RequiredInvalid
Reasonable Interest Rate – The maximum interest rate that may be used for a SEPP plan is any interest rate that is not more than 120 percent of the federal mid-term rate for either of the two months immediately preceding the month in which the distribution begins
Reasonable Interest Rate
RequiredInvalid
Actual InvestmentRate
RequiredInvalid
IRS Penalty Interest Rate
RequiredInvalid
Use Joint Calculations
No Yes
Report to View: Table of ValuesChart
72(t) Annual Payments
27.9 Years
Life Expectancy
$30,729.14 [$2,560.76/mo]
1] Minimum Distribution Method
$48,000.00 [$4,000.00/mo]
2] Amortization Method
$47,874.85 [$3,989.57/mo]
3] Annuitization Method
Date:4/5/2010
Beginning IRA Balance$857,343
Allocated to SEPP$857,343
Balance of IRA$0
Initial Annual Payment$48,000
Elapsed Time Period5 Years
Cumulative Payments$240,000
Balance of SEPP$857,309
Balance of IRA$0
Remaining Account Value$857,309
2010-04-06 04:01, By: marceya1, IP: [24.148.10.164]
L8: 72t distribution methodMarcey,
If you want $40K per year, and plan to start in April, then use a starting balance that will get you that annual payout, using the reverse calculator—pretty much what you showed in your first calculator example.
Not sure why you are now showing $48K with much higher starting balance??? We assumed you had one large IRA, so we were saying to move the amount you need (for the 72t plan) to a new IRA account (after figuring out what the amount is using the reverse calculator) and leave the rest in the old IRA. Then the new IRA will be your SEPP (72t) IRA. Most custodians let you make the trustee to trustee transfer without disturbing your fund allocation, so you do not have to convert your holdings to cash before moving the total that you need.
You could also move a smaller amount out, leaving the starting IRA balance you need in the old IRA, ore even use a total from 2 IRAs that meets your needs to form teh SEPP IRA plan. Any IRAs included in your calculations for beginning balance are then governed by the 72t rules, so they cannot accept new money, or have other money taken out (other than the annual total) or you bust the 72t plan. Once that figure arrives or ends up in the shosen IRA, for which ever way you do it, use the calculator again with that exact balance (not what you hoped it would be becuase it could change a bit) moved or left in old account (make sure you get a printout of your starting balance figure to keep) to get the final figure for your payout each year, and save that plan documentation.There is a form on this site that you can use todocument your plan.
Do not get hung up on playing with the investment performance figures to figure out what will make your balance not change as you take out money. It will never work out to the figure you are using, and is a waste of time.I hope this helps. KEN2010-04-06 04:25, By: Ken, IP: [24.148.10.164]
L9: 72t distribution methodHI KENLet me clarify my confusion I am still developing my 5 year budget and adding in 3% annually for inflation, then took the average ($3800/mo- 4300; average =$4K/mo). Recalculating with annual payout of $48000/yr, formula came up with higher IRA balance.
Trying to figure out income taxes, have not been paying any during unemployment with many deductions. Also trying to decide whether or not to finance my rental FL condo from payout or keep paying it from taxable savings accounts ($28K). Worry that taxable funds will run out and may need a new car (11 yo saab) or roof. Hard to make a budget when my large old house is on the market, am trying to down-size, but could take 2 years to sell, who knows.
I have multiple IRAs with two different brokerages. The largest at Smith Barney is 738,508 and a few small ones (Beneficiary IRA, Roth, SEP).
Thought it would be conservative to just use the largest one for simplicity sake and to be prudent by preserving the other ones.
Will forget about investment return. Just did it for my own peace of mind. My broker had advised that I could take 10% out of my IRAs and estimate 10% portfolio growth. That isn’t possible. Thanks again so much. Can’t believe you give such detailed, thoughtful answers.2010-04-07 03:34, By: marceya1, IP: [76.205.75.209]
L10: 72t distribution methodMarcey,I would recommend you start by doing one 72t with the largest Smith Barney one, and leave the others on the sideline for now. You may want that $48k payout, so move some money over to it before you start via trustee to trustee transfer only.. If that 72t it is not enough money over time,then you can start another small one next year. If you don’t need it all within the 5 year span it has to run, you can make one time switch on either one(or both if you end up having two) to the minimum distribution method for the remaining years of the 72t. I have a large 72tsince 2006 that I just switched to minimum distribution method in 2010, and it ends in 2011. I have a smaller one that I started in 2007 to cover the mortgage at a second home. The switch to minimum method in 2010 on larger one was because we sold primary home last fall, and paid down the mortgage on beach home that is now our primary, soI don’t need that much out of my IRA now. I just passed 59 1/2 last fall, so my 3rd IRA that is not involved is available now if I cut back too much by switching large one to minimum dist (appx $40k less). Most people will say why start a 72t (the possible 2nd one) when you are 58, but you know you will need to take something out of your IRAS on an ongoing basis. If you have non IRA funds to get you to 59 1/2 then skip the idea of 2nd 72t, but if not the combo of switching one or both to minimum dist allows you to control the outflow, and if you have the 3rd IRA, it is you escape valve (with penalty if before 59 1/2, and without penalty after that).That kind of thinking gives you flexibility both ways, and after you pass 59 1/2, you can take whatever you need out of a non 72t IRA without penalty, and without disturbing your 72t plan. Shoot the guy who told you you could take out 10% per year.. (unless he has a way of guaranteeing the 10% return to offset it, and he won’t) Even after the 72t plan ends, that large a percent of annual withdrawal is suicide, unless you are in your 80’s and not very healthy…. Most places I have read tell you to keep it to 4% or less, so fluctuations in your returns do not kill your next egg. In the year after big gains (I am still waiting for one that is not really just a partial offset to larger prior losses) you can take a little more out the next year (after 72t plan ends) and still not be doing too much damage to your principle.KEN
2010-04-07 04:11, By: Ken, IP: [71.192.120.143]
L11: 72t distribution methodHi, Marcey:
I am sure that Ken is speaking rhetorically when he suggested “Shoot the guy…” but firing his silly patootie would not be beyond the realm of well-earned just desserts. Even suggesting that a retirement account can sustain a 10% per year drain is foolish in the extreme and not what one should expect from a so-called professional financial advisor.
There are many calculators on-line that you can use to show what happens to a $1,000,000 retirement account when it is subjected to a 10% withdrawal rate… and it ain’t pretty! Since this money may well have to last you for 35-40 years, it will pay handsomely to take REALLY good care of it so that it can do the same for you.
Many of the people who frequent this web site are self-trained in the area of personal finance and we also have some true professionals here to ride herd on us and offer their wisdom, experience, and suggestions. All of that adds up to some pretty decent coverage of this subject. Additionally, no one here is trying to sell you on any particular investments so our advice will be for your benefit and not for ours.
I have been reading and learning about personal finance for over 30 years now and I have yet to run into a single pro who would suggest taking 10% from a retirement account as a proper way to fund retirement living. The most conservative advisors suggest taking no more than 3-4% from your account. Most moderates suggest 4-5% and a few more liberal minded folks suggest 5-6%. Even this latter amount is significantly below the 10% that your advisor suggests can be done.
I fit into the moderate camp on this and am taking 4.6% from my IRA per year. In spite of 2 recessions in the past 10 years and the fact that my account has shrunk somewhat, it is still large enough to live on comfortably. I am confident that I am not draining my account excessively, even during these poor economic times.
As with many aspects of investing, retirement planning and investing rely on diversification and risk management. It is too easy to become comfortable with a portfolio of +80% stocks when times are good and the markets are rising. It is too easy to forget that a severe bear market can come upon us quickly and devour several years worth of gains in only a few months. Asset allocation is our friend and we need to formulate a good plan for that and stick to it. For me, that is approximately 50% in stock mutual funds, 30% in short and intermediate term bonds, and 20% in cash or cash equivalents. We can modify our plan from time to time but we need to be wary of tinkering with it too often or we may do more harm than good.
One often over-looked aspect of asset allocation is the amount of cash and / or cash equivalents in our portfolios. While most cash instruments do not return a lot of profit, they do give us some safety from losses. This is a case of the return OF capital is more important than the return ON capital. An allocation of 15-20% in cash appeals to me but may be more or less than that which appeals to someone else. You need to find your own comfort zone on this but resist the urge to have only a small amount of cash in your retirement stash. There will be times when it will come in VERY handy. Additionally, having some cash available in a portfolio allows the investor to buy into stocks or funds when their prices are low. They can later sell these shares when prices are higher to replenish their cash supply.
Regards,
Ed_B
2010-04-07 07:46, By: Ed_B, IP: [71.236.183.224]
L11: roth ira ?
Can ROTH IRA be used for 72t or not? I have other types too: Beneficiary IRA, SEP IRA, gather they can be used but not combined into trad IRA. Not sure? Thanks.2010-04-07 19:00, By: marceya1, IP: [76.205.75.209]
L12: roth ira ?Each type of IRA must stand alone. You cannot combine the different types into one account. The SEPP Universe can be created by adding together the values of different IRA and qualified plan types but they must always remain individual accounts.You do not need a SEPP Plan for your Beneficiary IRA and it should not be included within your SEPP Universe.Death is one of the two exceptions for the 10% penalty. You must take theRequired Minimum Distribution (RMD) annually and you can withdraw more if you wish without incurring the early withdrawal penalty, regardless of your age.Jim2010-04-07 19:29, By: Jim, IP: [70.167.81.119]
L13: roth ira ?While Jim is correct that the various types of retirement plans must remain in separate accounts AND in separate 72t plans, there IS an exception for Roth IRAs with respect to the 72t plan.It is established in IRS Reg 1.408A-4 as copied below that a Roth conversion can be done from a 72t plan TIRA account and the Roth then becomes part of the “SEPP universe” along with what is left of the TIRA, if the conversion is partial. You then have two different IRA types from which you can choose for the annual distribution needed to meet the 72t plan requirements. That choice will have different income tax implications. This Reg is copied here:>>>>>>>>>>>>>>>>>
Q12. Can an individual convert a traditional IRA to a Roth IRA if he or she is receiving substantially equal periodic payments within the meaning of section 72(t)(2)(A)(iv) from that traditional IRA?
A12. Yes. Not only is the conversion amount itself not subject to the early distribution tax under section 72(t), but the conversion amount is also not treated as a distribution for purposes of determining whether a modification within the meaning of section 72(t)(4)(A) has occurred. Distributions from the Roth IRA that are part of the original series of substantially equal periodic payments will be nonqualified distributions from the Roth IRA until they meet the requirements for being a qualified distribution, described in §1.408A€“6 A€“1(b). The additional 10-percent tax under section 72(t) will not apply to the extent that these nonqualified distributions are part of a series of substantially equal periodic payments. Nevertheless, to the extent that such distributions are allocable to a 1998 conversion contribution with respect to which the 4-year spread for the resultant income inclusion applies (see A€“8 of this section) and are received during 1998, 1999, or 2000, the special acceleration rules of §1.408A€“6 A€“6 apply. However, if the original series of substantially equal periodic payments does not continue to be distributed in substantially equal periodic payments from the Roth IRA after the conversion, the series of payments will have been modified and, if this modification occurs within 5 years of the first payment or prior to the individual becoming disabled or attaining age 59 1/2, the taxpayer will be subject to the recapture tax of section 72(t)(4)(A).>>>>>>>>>>>>>>>That said, the complexity of doing a conversion increases the risk of busting the plan and also the additional taxes must be paid. So while it CAN be done, in most cases it probably should not be done.In summary, you could have a TIRA and a Roth IRA and set up a separate 72t plan for each, or you could set up a single 72t plan that included the TIRA and the Roth IRA for the opening account balance. Any 401k or similar plan can have a 72t planalso, but only one such account per each 72t plan.As Jim indicated, any beneficiary account issues only death distributions (Code 4) and therefore never has an early withdrawal penalty. With no penalty there is no reason to ever include a beneficiary account in a 72t plan. 2010-04-08 00:31, By: Alan S., IP: [24.116.165.60]
L14: roth ira ?ALANPerhaps I should do a ROTH conversion before I start SEPP. Guessing my current and retirement tax brackets are about the same other than social security income being added in at age 62.
Current
TIRA= 774700
ROTH= 55776
TIAACREF=IRA =205,000
Suggestions as to how much is worth converting now ($35k)before 72t starts? Or how to decide how much? thanks again so much. Marcia 2010-04-08 16:42, By: marceya1, IP: [76.205.75.209]
L15: roth ira ?It would remove some ution risk if you converted before starting the SEPP, but you still must allow funds to pay the taxes and these funds should not come out of your conversion distribution. Even though you can report 2010 conversions in 2011 and 2012, thus delaying the taxes considerably, you would have to face these tax bills in the middle of your SEPP term. The good point is that you would get this done before SS income is added to your AGI.As to how much to convert, no way to tell without considering dozens of factors. The most basic is your tax rate for the conversions vrs your guess of what they will average in retirement. You might run through some of the conversion calculators at Fidelity or Vanguard sites or any other sites. These calculators are not fully comprehensive in that they do not address minor factors like whether you have LT care insurance or not, expect an inheritance and similar contingencies. And now we have talk of a VAT tax which will degrade the value of a Roth conversion vrs a TIRA. One solution is to just convert a small amount each year to fill up your current bracket, but your case does not permit that with the 72t plan looming. All I would say is not to overdo the conversion amount unless you locate a specific reason to after considering all the variables. 2010-04-09 03:14, By: Alan S., IP: [24.116.165.60]
L16: roth ira ?ALANAppreciate your thoughts re; roth conversion. No looming reason on horizon at all. Have been doing a bit at a time. 2010-04-09 11:47, By: marceya1, IP: [76.205.75.209]
L17: Use assets before taking 72t for living expenses?Which assets should I use up first to fund living expenses from age 57 onto retirement? Expect Social security but no pension in future.
Considering a 72t or use of qualified and non-qualified assets below to pay monthly living expenses. Monthly budget = $4400.
Assets include: non-qualified taxable accounts = $34K.
Beneficiary IRAs = $22K -can use bene IRAs without penalties.
Roth = $58K Can use ROTH IRA in 2 years without penalty/taxes.
Trad IRAs = $982K.
Investments mostly in equities. Hate to liquidate at a loss or to deplete taxable emergency funds completely. May need a car (mine is 11 yo.) and/or house repairs.
Am trying to sell my house but market is low here, no offers. Due to continuing unemployment, I do not expect a job. Tough market here, age 57, am trying to sell my house. Partner in nursing home.
Unemployment benefits ending this month. Due to continuing unemployment, I do not expect to work a regular job. Tough market here, age 57, am trying to sell my house. Partner in nursing home. 2010-04-14 19:48, By: marceya1, IP: [76.205.75.209]
L18: Use assets before taking 72t for living expenses?While the expertise on this list-serve is fantastic, I think that what you are doing, and getting, is exactly what it is “GOOD FOR WHAT YOU ARE PAYING FOR IT”You have too much at stake. Go not be so cheap. Hire a professional to work with you to do planning with you. You have many moving parts, which you keep adding and changing, and there are many alternative approaches to your situation.For example, I do not see anywhere that you have funds available outside of your retirement accounts. Almost all analyses require you to pay the taxes for ROTH CONVERSIONS should not be done with additional funds from your IRAs.ROTH CONVERSIONS in 2010 are automatically considered as taxable income for 1/2 in 2011, and 1/2 in 2012. You would have to make a special election to have it taxed in 2010. Once you reach 59 1/2, you can take ANY AMOUNT, which will be subject to income taxation, but exempt from the 10% penalty for early distributions before 59 1/2.You are within about 2 1/2 years of 59 1/2, at which point you would not have any restrictions. A financial and/or tax planner might be able to develop a realistic plan to get you to 59 1/2, without necessarily using a SEPP 72-T plan.The complexities of your situation might cost $ 2,500 or more, but those professional services will save you a lot of money and aggravation in the long run. If you continue to try to do this yourself, it will probably cost you many times this amount for various reasons. 2010-04-15 03:32, By: dlzallestaxes, IP: [173.49.30.37]