SEPP timing

L1: SEPP timingFirst and foremost I want to thank you guys for an excellent forum on SEPP plans. I have followed this site for years and recommended it to many financial planners and retirees.

I am in the process of planning a SEPP to begin in 2008 and need some advice on timing.
I’ve seen some discussions about partial payments at the beginning and end of the plan and it confuses me. It may be applicable only to monthly withdrawals though.

I am currently 53, my birthday is in Aug. (1954). I will start my plan in 2008. I will be 59.5 years old in February 2014. My originally intended plan was to take the annual withdrawal in January of the year. If I do that, there will be six withdrawals to the plan, the final withdrawal falling just before I turn 59.5. If I take my withdrawals in March, there will be 5 withdrawals, the final one occurring in March 2013. In March 2014, I will be past the 59.5 age so therefore, any withdrawals in 2014 (after February) are outside the SEPP plan. Is my understanding correct?

I plan to use amortization with annual recalculation using the balances and interest rates of December of the preceding year.2007-09-06 08:46, By: rbn, IP: [65.28.73.63]

L2: SEPP timingExcellent planning to wait until March 2008 to start, but it is unnecessary. You could take ANNUAL withdrawals in January of 2008 and the next5 years (2009, 10, 11, 12, and 2013), but you do not have to continue the ANNUAL frequency. You can change to monthly at any time, even for that final calendar year. Then you could take prorated monthly distributions for January and February in 2013, or a full annual amount if you wanted to. You are allowed either option in the final year. Depending upon your tax picture, you could similarly take a full ANNUAL distribution in 2007 or prorated monthly, and reduce your annual amounts for the next 5 years, until 2013 when you take either an annual or prorated monthly amount, depending upon your tax situation then.2007-09-06 13:55, By: dlzallestaxes, IP: [151.197.180.95]

L2: SEPP timingI agree with the approach outlined by dlz. However, in the final year where he shows 2013, that should be 2014, ie you could either take 1/12 each in January and Feb of 2014, or just one distribution of 1/6 your annual amount. Then, starting in March, 2014 you can take out any amount you want to.
One other question – are you really sure that annual recalculation is worth the added risk? You must do 7 different calculations, and just one error could be costly. One way to avoid that risk is to start out with a little more than you think you need, and that protects you on the adequacy side, and if your funds build up lateroutside the plan you can always make the one time switch to RMD to cut back on the rest of your distributions to preserve tax deferral. Remember, interest rates may be heading for a reduction cycle, although it is not always evident how the mid term rate will react to fed fund rate cuts by Bernanke.
2007-09-06 16:11, By: Alan S., IP: [24.116.165.60]

L2: SEPP timingIrrespective of of when in 2008 RBN starts his SEPP plan he will have satisfied the 5-year rule ny 12/31/13; therefore he need only satisfy the age 59 1/2 rule. Therefore, for the period 1/1/14 to 2/28/14 he has three (not two) choices:
1. A full annual distrbituion.
2. 1/6th the annual distribution taken sometime between 1/1/14 and 2/28/14.
3. No distribution; e.g. zero.
The key to applying these “tail” rules is that there can be NO dstribution that is not a SEPP distribution before satisfying both the 5 year rule and the age 59 1/2 rule.
TheBadger
wjstecker@wispertel.net
2007-09-06 16:32, By: TheBadger, IP: [72.42.66.101]

L2: SEPP timingThank you all for your excellent comments which I am taking to heart:

dlzallestaxes
Starting in late 2007 is an excellent strategy for reducing the tax burden from 2008-2013. By a quick calculation I can save about $5000 in taxes doing that. It definitely deserves consideration although I may have income this year that would reduce its attractiveness. I will certainly keep a close eye on it. I just don’t want to be receiving my distribution close to the end of the year. Too much chance of busting the plan.

Alan S.
You are 100% correct. An annual recalc carries more risk than I probably need to take. My selection of recalculation stems from original planning, when I was going to start the SEPP at 50 in 2004. Interest rates were lower and I was concerned about a longer payout period. Current rates are much more favorable and as you pointed out are probably headed down (the reverse of three years ago). This might also be a good reason to start the plan in 2007 i.e. to lock in the rate.

TheBadger-
I understand by your statement that I do not need to take any distribution in 2014 under the SEPP, regardless of when I start it. If I should need to take a withdrawal in January, it can be either a full annual withdrawal or a 1/6th withdrawal. Again, if I start in 2007 this would be a moot point as I will have taken my 2013 distribution in Nov or Dec. and should be in good shape.

Thanks again for your comments and your support2007-09-06 21:46, By: rbn, IP: [65.28.73.63]

L2: SEPP timingIf you were to start it now, you could take 1/3 of the annual amount in Sept. or monthly over Sept-Dec, or an entire annual amount at any time between now and 12/31. It depends upon your other taxable income for 2007, plus which option you chose for the SEPP 72-T distribution. In 2014 if you only took a distribution in January, it would be 1/12 not 1/6. If you took it for Jan and Feb, it would be 1/12 each or a total of 1/6. But if you start in 2007, then you will be done your 5 years by 2013, and after Feb 2014 you will be over 59 1/2, and can, or not take, any amount, depending upon your tax and cash situation then. By the way, after 59 1/2, you could do some great tax planning if you don”t need the money, if you are in the 15% tax bracket then you could do ROTH IRA conversions from your IRA, pay taxes at 15%, and have all future growth never taxed to you, your spousze, your children, or even your grandchildren !!!!! THAT”S WHY IT”S CALLED “PLANNING” !!!!2007-09-06 22:47, By: dlzallestaxes, IP: [151.197.180.95]

L2: SEPP timingRBN,
Most of the “heavy hitters” have weighed in on your question. You are getting good advice!
KEN2007-09-07 05:30, By: Ken, IP: [75.67.65.254]