Can you take less than the SEPP

L1: Can you take less than the SEPPI”ve calculated the SEPP for one of my clients who is 56. The amount was a little over $24,000 per year using the annuitization method. My client only wants to take out $7,000 per year over the next 5 years to pay a premium on a life insurance policy. Is this ok or does he have to take out the full $24,000 SEPP? Also, I”ve researched Publication 590 as well as the Internal Revenue Bulletin 2002-42 and can”t seem to find a direct source of information that addresses this issue in a clear and concise manner. Is there a source?2006-08-30 14:04, By: Kyle, IP: [161.233.20.70]
L2: Can you take less than the SEPPGood afternoon, Kyle:
Yes you can take less than the $24,000 you calculated, and you have two option how to get there. The support you are looking for is verbiage in Pub 590 and 2002-42 that specifies the max limit of 120% of the AFR foreither of the twomonths preceeding the date of the first distribution. Since this specifies the upper limit you may use, then you are free to use a percentage “less than” the max rate. Use either of the following two methods to solve your problem:
1. Lower the distribution percentage in the calculator until you get the $7,000 you want. You will have the entire amount of funds available in the one IRA, but you assume a rate well below the max rate of 120%.
2. A better way is to use the “Reverse Calculator” to determine the amount of corpus you will need in the IRA to generate the $7,000 distribution while using the max rate that equals the 120% of the AFR. Then you set up a second IRA for the remainder of the IRA corpus not needed and you have asource ofemergency funds to tap without endangering the SEPP Plan.
Jim2006-08-30 14:24, By: Jim, IP: [70.184.2.72]

L2: Can you take less than the SEPPKyle,
The $24k is probably the most that your client can withdrawal w/o penalty. The IRS doesn”t care if you choose to to take outless than that amount. But once you est. the SEPP your client is locked in at the choosen $ amount for the next 5 yrs.
Many of the experts on this forum would recommend that you split the IRA into 2 seperate accounts and only est. the SEPP on one account and then if your client needed to have access to additional funds he could do so w/o “busting” the SEPP.
If I where you I would play around with the calculators on this website, especially the reverse calculator, and see how much you need to have in one IRA in order to disburse the required $7K.
Hope this helps. Also before you make any rash moves with this client see what the experts on the site have to say.
Nick

2006-08-30 14:28, By: Nick, IP: [205.135.136.10]

L2: Can you take less than the SEPPKyle,
Jim happens to be one of the experts that I was referring to. Apparently he types faster than I do and was able to post a response before I was.

Nick2006-08-30 14:58, By: Nick, IP: [205.135.136.10]

L2: Can you take less than the SEPPI appreciate the two responses. One thing I didn”t address is that the current IRA is in a variable annuity and has a 7% surrender charge so the client has no desire whatsoever to split the amount into two IRA”s to increase flexibility as he would have to pay a surrender charge to do so.
Also, he has another large IRA that will not be subject to the SEPP so he could use that for flexibility in the future needed. I know I can lower the interest rate for the calculation, but I don”t believe lowering the interest rate will allow me to drop the SEPP from $24,000 all the way down to $7,000. My main question still is can the client simply take less than the SEPP as long as he doesn”t change to amount for 5 years?
I believe my question has been answered but any confirmation would be appreciated. I just don”t want my client to be subject to an audit in the future, because he took out “too low” of a SEPP.

2006-08-30 14:59, By: Kyle, IP: [161.233.20.70]

L2: Can you take less than the SEPPKyle:
From the additional information you have provided about your client, theneverything should work out just fine to take$7,000 vs the $24,000 you have calculated for the max SEPP Distribution. However, I would work with the calculators to produce a distribution amount that is as close to the $7,000 figure as possible, then use that amount for the distributions. Your client would want to be able to show the IRS how the distribution amount was derived. It”s called “an effective paper trail” and that will solve a lot of problems in the future.
I understand the problem of the VA being the SEPP IRA. Since your client has an additional IRA for the “emergency funds,” then lowering the SEPP Distribution rate is OK. One thing to look out for is staying under the maximum, penalty-free distribution imposed by the VA contract and any “living benefit riders.” It sounds like you”ll be OK but you should double check.
BTW, Nick has become quite knowledgeable about 72(t), and he writes quite well also. Sometimes I get a little wordy in my responses.
Jim2006-08-30 15:48, By: Jim, IP: [70.184.2.72]

L2: Can you take less than the SEPP
Just wanted to point out that the calculations for SEPP must be based on life expectancy. In the above case there is a possibility that you may not be taking a minimum amount to qualifiy as life excectancy. If you zero out the interest rate you are left with an amount based on a the single life expectancy. If you do less than that amount you will not be using a life expectancy calculation. You could use either a joint table or the Uniform Table to reduce the amount even more but you will still have a mimimum amount to distribute.
Example: Age 56 / SEPP Starting Value $315,947.32 would give an annual Amortization amount of $24,000.

2006-08-31 11:12, By: Don, IP: [155.188.247.6]

L2: Can you take less than the SEPP
Kyle – follow Jim”s earlier advice (If I where you I would play around with the calculators on this website, especially the reverse calculator, and see how much you need to have in one IRA in order to disburse the required $7K) and only allocate to the SEPPthe amount required for an annual 7k paymentusingthe current interest rate. The balance can stay in a secondary IRA (not part of the SEPP) for emergencies, or perhaps an additional SEPP for different purposes.2006-08-31 11:20, By: Gfw, IP: [172.16.1.73]

L2: Can you take less than the SEPPSorry didn”t finish the example before I hit the post button
In the example I used the Sepember interest rate of 6.27%.If this interest rate was changed to a o% the annual amount would be $11,008.62 when using the Single Table.This could be reduced to $7,762.83 if using the Uniform Table. In either case the distribution of only $7,000 would not be in compliance with a life expectancy method.

2006-08-31 11:20, By: Don, IP: [155.188.183.5]

L2: Can you take less than the SEPPI can understand why the client does not want to split the IRA so as to avoid paying the surrender charges. Further, if the stated objective is to withdraw $7,000 per year for 5 years (for whatever purpose) then I would avoid the RMD method for two reasons: (1) to simply preserve the one-time switch to the RMD method as a contingency; (2) the RMD method, almost by definition will yield too much as an annual distribution in the 1st year and it will go up in subsequent years.
That leaves us with adopting the amortization method. I see the solution. Based on an account balance around $325,000; age 56; therefore a life expectancy of 28.7 years. Therefore, an interest rate assumption of -3.0% should do the trick quite nicely.
Now, some number of you will say that one can not adopt a negative interest rate; it”s illogical. I will agree that a negative interest rate is intuitively illogical; that does not make it wrong. Remember that the interest rate test as proscribed bhy Rev. Rule 2002-62 is a one-sided test; e.g. “that does not exceed”; therefore, ALL interest rates less than the maximum are acceptable.
TheBadger
wjstecker@wispertel.net

2006-08-31 17:44, By: TheBadger, IP: [72.42.67.24]