SEPP pymnts & 401k contributions

L1: SEPP pymnts & 401k contributionsWe are interested in doing Amortization Method SEPP pymntsusing $450,00 of my husband”s $1,300,000 IRA. He is 52 with health issues which limit his ability to work but, are not severe enough for any kind of disability. So, to replace his lost income and permit him to “completely retire” while his health holds steady, we decided to do the SEPP. Also, this will enable us to get money out of the IRA and invest any excess that we won”t spend. I will continue to work for the next 5 years until I turn 54. I participate in my employers 401k plan up to the company match on 6%.We want to keep our tax liability down within our 15% current tax bracket until I retire. In order to accomplish this, we were thinking that ifmy raisesbumps us up a tax bracket that I could just increase my 401k contributions to compensate. I believe that we will be in about the same tax bracket after retirement. This will also enable us to “transfer” assets from my husband to me and could help with estate taxes down the road. I currently have $85,000 in 401k and IRA account.
Does this sound like a plan that would work? Is there anything we need to look out for?
2007-07-08 15:20, By: dillonfan, IP: [66.117.248.206]

L2: SEPP pymnts & 401k contributionsIn general, this looks OK. There is no reason not to take a largerSEPP payment to allow you to fully utilize the company match on your 401k. Note that you cannot take only a portion of an IRA account for a SEPP, it”s all or nothing. But this is easily solved by partitioning his IRA into two account before starting the SEPP, with the account earmarked for the SEPP containing the exact starting balance needed to generate the income you want. Down the road, if additional funds were needed, he could again partition the non SEPP account and start a second plan. The non SEPP IRA account would always be available for any one time emergency needs.
You did not indicate your combined gross estate, but the marital deduction will eliminate any estate taxes on the first death. The unified credit rises to 3.5mm in 2009, and I seriously doubt that it will be lower than that in the future. If you are still concerned, a bypass trust should be set up to fully utilize the credit of the first spouse to die.
If neither of you has a Roth IRA, after establishing the SEPP account, you could tap the other account for Roth conversions if you are income eligible, up to the top of your 15% bracket. These would be modest annual conversions, just enough to provide the tax diversification of having at least 10% of your IRA assets in a Roth. That gives you a hedge against rising tax rates, and also decreases your gross estate somewhat due to the tax payments. That”s about the only reason to tap more TIRA assets than needed, as generally you should keep the tax deferral intact.
There are some other tips you could pick up by reviewing this site, particularly those that will allow you to set up the SEPP with the best chance of not having to bust it later on, either intentionally or by inadvertant error.

2007-07-08 16:45, By: Alan S., IP: [24.116.66.98]

L2: SEPP pymnts & 401k contributions
Thanks Alan S. for your reply.
Currently, my entirepaycheck is required for us to cover our living expenses. And, it still is not enough to cover it all. So, I am limited on how much I can contribute to my 401K. I just force myself to contribute enough to get every penny of my employer match. If I contribute more to the 401k, there would be no further match, but I could limit our current tax liability.
As far as the Estate Tax avoidance planning is concerned, we are trying to leave the “principal” of our retirement accounts (plus other assets) to our children.And, given that repeal ofthe Estate Tax when itdrops back to the $1 million exemption does not seem likely, we are trying to plan for that as well. My husband”s IRA alone already puts him over the exemption. So, when the estate is passed to our children, the marital exemption will just deferr the problem to them. We are also educating our children about stretching the IRA”s for maximum benefit and trying to preserve 2 exemptions for more flexibility.
Am I thinking this through too much?
2007-07-09 02:40, By: dillonfan, IP: [66.117.248.206]

L2: SEPP pymnts & 401k contributionsAlan has given you some really great advice, so let me add to his comments. The first item is your plan to retire in 5 years when you turn 54. Why don”t you work alittle longerand retire in the year that you turn age 55 and then you can take advantage of the “age 55 exception” to the 10% penalty with your K-plan? More specifically, if you retire during the year you turn 55, and if your K-plan will allow periodic withdrawals like monthly, quarterly or yearly, then you can take withdrawals from the K-plan, pay the ordinary income tax but you will not be subject to the 10% penalty. When you process an IRA Rollover from the K-plan, then you lose this exception and will have to employ a SEPP Distribution Plan. As long as you reach age 55 “during the year of retirement,” which means you may retire at age 54 but you will be 55 atleast by 12-31-XX of the year of retirement, then you qualify.
Since you husband has health issues that will make him terminate working, get with the program and check out whether he can qualify for the “disability exception” to the 10% early withdrawal penalty. This takes time so quit burning daylight.
Since you stated that you want to leave your assets to your children, and you are talking about some substantial values, then here are two things you need to incorporate into your estate plan. First is to utilize trusts for you and your husband … and you need a good, estate planning attorney for this and you should not try “DIY.” Secondly, plan on buying some large life insurance policies on you and your husband, including a “second-to-die” policy. Too many non-spouse (children) beneficiaries of very large IRA”s and qualified plans (K-plans, pensions, etc.) are shocked when they see how much shrinkage occurs to these plans when Federal / State income and estate taxes have to be paid. Life insurance is used to replace these loses.
What will happen to the current estate tax structure in the future? Good question. However, in the current political environment I”m not too comfortable it will be “friendly” for folks with large estates and large retirement plans. Investing in some good, sound estate planning now, andpositioning the assets within trusts rather than using “testimentary trusts” built within wills is cheap insurance and well worth the price of admission.
Good luck.
Jim2007-07-09 08:13, By: Jim, IP: [24.252.195.14]

L2: SEPP pymnts & 401k contributionsA substantial problem with doing some good estate planning now is that we do not know what the lifetime estate tax exemption will be past 2011. It is $2M now, rises to $3.5M in 2009, the estate tax disappears entirely in 2010, and then it returns in 2011 with a $1M exemption. With acrobatics like this, who can make good estate plans?
My wife and I are good examples of this. We have an estate of about $1.6M now. It is all exempted from the federal estate tax for the next3 years but not in 2011. We would then need an A/B type trust to shield it all from estate taxes, which are onerous at up to 46% of the money above the exemption amount.
Further, we expect our estate to grow considerably over the time that we have left on this Earth. We”ve averaged about 11% growth in our investments over the past 5 years, which will double our estate in about 6.5 years. At ages 57 and 56, it is likely that we both have a while before checking out of this hotel. During that time, all manner of changes are likely to occur. I hope that they address both the estate tax exemption and the AMT ASAP… but who is to say that they will? Otherthan when voting themselves a pay raise, Congress isn”t exactly what anyone would call efficient.
Ed 2007-07-09 15:22, By: Ed_B, IP: [67.170.159.37]