Using a SPIA for SEPP Distributions

L1: Using a SPIA for SEPP DistributionsI have two different scenarios that involve the possible use of an immediate annuity (SPIA) to generate the stream of SEPP distributions. I would appreciate any feedback on these situations.
Scenario 1: A 55-year old IRA owner has $300,000 in his IRA. Let”s assume that the SEPP calculation method he selected resulted in an annual SEPP distribution of $20,000 and that he wants to limit the distributions to only five years. If hetransfers money from his IRA account to purchase a 5-year period certain SPIA to generate the $20,000 annual payment for five years, is this an acceptable method for taking qualified SEPP distributions?
Scenario 2: Same facts as the case above, except that the IRA owner wants to take annual distributions that are less than the SEPP distribution produced by any of the three calculation methods and he wants to continue the payments for life. I know that he can accomplish this by taking his IRA account and splitting it up into two different IRA accounts and then establish SEPP distributions from just one of the accounts, but if he transfers a portionof the $300,000 directly into a SPIA with a”life only” payout option, would the IRS acceptthatas an appropriateSEPP distribution?

2007-03-30 06:56, By: Lawrence A, IP: [69.38.115.33]

L2: Using a SPIA for SEPP DistributionsScenario 1: As long as all $300,000 is allocated to the SEPP and not just the SPIA values the plan will work. It works best iof the IRATrustee/Custodian uses a Custodial Agreement to gover it”s IRA contracts. If yes, purchase the SPIA and have the$20k paid into the IRA account and then do a withdrawal from there – it is treated as any other IRA investment.
Scenario 2:if he transfers a portionof the $300,000 directly into a SPIA with a”life only” payout option, would the IRS acceptthatas an appropriateSEPP distribution?Maybe, but at the age of 55 I really can”t understand why anyone who understands how a life annuity works would by a life annuity or what would be the honest motivation to sell someone at age 55 a life only annuity.
Just my thoughts…2007-03-30 08:11, By: Gfw, IP: [24.148.85.129]

L2: Using a SPIA for SEPP DistributionsGFW: Re: Scenario 2
I could not agree with you more about buying a single life annuity with IRA money or any other money. This is, as you know, the only payout scheme available to participants of Defined Benefit pension plans both public and private. In essence these individuals are being compelled to purchase with their accrued benefit/pension reserve a single life annuity whether or not it is in their best interests. Should they desire to take care of let”s say a spouse they must accept less during their joint lifetimes when more not less income is required. The Defined Benefit pension plan that compels lifetime annuitization does not recognize the principle that one size does not fit all and because of this serious flaw the Defined Benefit plan is severely over rated.2007-03-31 07:13, By: joel, IP: [24.187.32.203]

L2: Using a SPIA for SEPP DistributionsJoel,
I retired in 2005 at age 55 from private sector job in a privately held 125 year old company after working there for 25 years, and ithad Defined Benefit pension plan. I left when the company was bought by a much larger global coatings company, who promptly froze the pension plan where it stood, and ended the DB plan for the future, but guarantee the employeestheir already earned benefits. Because I left 10 years early (10 yrs before being 65), my benefit was cut down to 25/35th”s of full pension calc, and then cut again to 50% payout because I wanted to start collecting early. It was designed so thatthose who worked at least 20 years and stayed till 65,would end ended up with appx 50% of theiraverage monthly pay for last 60 months as the sum of Soc Sec and pension payments. For those with less service, it was proportionately less. I was glad to receive this pension ($1,865 per month with 100% spousal) at 55, and I suppose it is really an annuity, buthere are the options I wasgiven (at end), and they did include option to cover spouse, which lowered my monthly payment. The final number went up a bit to the $1865, but it is close and good for the example to show how the month amount changes based on the choice made. First two are on employee”s life only. Last two give options for surviving spouse. I chose the 100% spousal, partly because my mother in law is 94 years old, and my wife may have that same longevity gene. That cost my $900 per year over choosing the 50% spousal, and the 50% spousal choice would have cost me another$1200 per year over single life choice, so I gave up $2,100 per year to get same payment rate for both lifetimes. Our company also offered a 401k plan with 50% match, which is now in an IRA. I think as fewer and fewer companies are offering Defined Benefit plans, and opting only for 401k”s, many people are wishing that they still had the DB plan coverage. If I had stayed till 65, they would have been paying me about $6k per month (if thethe plan had not been frozen by new owners), which is a wonderful supplement to SS and IRA and 401k savings. I”m pretty happy with that check each month, and I guess I don”t see DB plans as a bad thing, especially when no contribution was ever made by me. To contrast, my SocSec benefit for life at age 62 is currently estimated (in their 12/2006 letter) at$1,638 per month, but I paid $96,000 into that plan and my employerspaid in another $96,000over the years that I worked. I agree that people trying to sell annuities are to be avoided in almost all cases, but the fact that a DB is really a sort of life annuity is not a problem for me. They did not design it to help support your children or grandchildren, like a stretch IRA can do in some cases.

Life Annuity
$1,914.08

Life Annuity with 120 Monthly Payments Guaranteed
$1,878.33

Joint and 50% Survivor Annuity
$1,809.73 / $904.87

Joint and 100% Survivor Annuity

1,716.17 / $1,716.17
KEN
2007-03-31 10:37, By: Ken, IP: [151.199.48.25]

L2: Using a SPIA for SEPP DistributionsDid you guys see the tax break Congress is kicking around now for life annuities? A 50% exclusion on up to 40,000 of annual payout. That would make these relatively more attractive. Of course the insurance lobby is really pushing this.2007-03-31 14:36, By: Alan S., IP: [24.116.66.98]

L2: Using a SPIA for SEPP DistributionsLawrence A,
I also wanted to comment on yourscenarios. If you want less than any of the three methods produce, you can simply reducethe Max allowable Fed Mid Term Interest Rate on the Amortization one until you get a percent that yields what you want to take out. It might be 3.5%, or 2.1% for your needs. That is allowed.. you just can”t exceed the posted rate for either of the two months that precede your first withdrawal. You can also employ the reverse calculator on this site to find out how big the IRA has to be with current rate to support the withdrawals you want, then move that much money (by trustee to trustee transfer) to a new IRA, and start the SEPP plan on just the new IRA, leaving the second one as a backup. If the person is already 55, then they only have to follow that SEPP plan for 5 years, and then either start taking more, less or the same $$ per year without penalty. There is no need to fool around with annuities.
I just computed a second possible SEPP plan (I have 3 IRA”s in all and one SEPP running) to support a second house I want to buy, and it (the calculator on this site) told me (at age 57) if I used the max rate for an April withdrawal and amortization method (single life), while assuming an 8% return on my money, the balance in that $450k IRA would be about the same 5 yrs later, after withdrawing $32k per year, or $160k total. If my investments only earned 6%, it projects still having a little over $400k left after 5 years in that account. You can also make a one time switch to the RMD method during the SEPP if you see that you do not need that much money, or that your balance is decreasing too fast. I”d need to read up on that switch concept that I have read about, and I”m not sure if you need to declare in your initial setup with your custodian that you reserve the option to make that change at some time in the future. I just wanted to throw that out.
To summarize, SEPP a/k/a 72(t) plans are very workable, and there is no need (if you already have money in an IRA) to worry about annuities. Just read lots of posting from the past on this site to get more knowledge.
KEN2007-03-31 18:57, By: Ken, IP: [151.204.251.232]