Risk Assumption Versus Risk Transfer

L1: Risk Assumption Versus Risk TransferWhat follows is essentially a personal opinion or editorial & is not (necessarily) the opinion of www.72t.net. Further, I will tell you in advance that Gordon & I actually disagree, at least in part, regarding my new opinions on SEPP plan risk assumption versus risk transfer.
I have thought as well as written on this subject before. I am now changing my opinion. Although I have not kept good contact records; my best estimate is that somewhere between 1/3rd and _ of the emails and phone calls I get start with either: (a) I started my plan in 2003 and since then I have executed transactions X, Y & Z; I am now being told that this is wrong. Can you help, can you fix it?۝ or (b) I relied upon Mr. Smith with ABC to set this up right. I am now being told it is wrong. Can you help, can you fix it?۝
The unfortunate answer is that 75% or more of the time, I can not fix it. Further, let’s all remember that the all the risks associated with an error are downside risks; there is zero upside potential.
Many individuals are thoroughly capable of designing and implementing their own SEPP programs; an equal number are not. Each taxpayer should self-evaluate and determine his or her abilities to go it alone versus seeking professional assistance.۝ Any guesses on who said that? I did on pages 112-113 of the book. The weight of practical evidence forces me to change my words to:
Irrespective of SEPP program complexity, every taxpayer should receive a formal written opinion from a qualified professional before commencing their distributions.۝
Why would I say the above? I originally thought the issuance of Revenue Ruling 2002-62 would clear the air۝ and make everything much more straight forward. The exact opposite has occurred. Taxpayers are making more errors than ever, most of which are irreversible. Taxpayers face four distinct risks in the design & execution of a SEPP plan:
(1)Strategy. Does the design of my SEPP plan(s) fit: today’s needs; tomorrow’s needs; and the flexibility to change 3 – 10 years down the road.
(2)Tactical. Did I do my math right? Did I in fact properly interpret the rules so I selected the correct interest rate?
(3)Execution. Both before the 1st distribution and all of the required subsequent distributions.
(4)Legal. Did the law (the IRC) or some pronouncement (the IRS) change in the last 30 to 360 days that either creates new opportunities or worse, closes a door?
Given the increased complexity of the SEPP landscape coupled with the harsh realities of an error; I am now of the opinion that going it alone۝ is the equivalent of performing financial open heart surgery by oneself. That said, where should a taxpayer turn for professional help? There are two places: a CPA (who specializes in tax and 72 matters; a tax attorney. Any other professional resource is unacceptable. Any other resource is either: unqualified, uninsured or has a conflict of interest. This includes: CFP’s, RIA’s, RA’s, CFA’s, brokers, your trustee, your brother-in-law and the IRS.
Every taxpayer should transfer the risk۝, e.g. buy a SEPP plan insurance policy by seeing a qualified professional (CPA or lawyer) before they start. Further, that professional should opine in writing with some language to the effect: It is my professional opinion that the SEPP plan computed in the manner and methods described are in compliance with IRC 72(t)(2)(A)(iv), and thus avoid the imposition of the 10% additional tax as described in 72(t)(1) & (4). Additionally, it is my professional opinion that the computational method, as described, is in compliance with Revenue Ruling 2002-62. Further, you are free to rely upon this opinion and distribute this letter in full to all other interested parties.۝
TheBadgerwjstecker@wispertel.net2005-02-23 19:07, By: TheBadger, IP: [66.250.23.21]

L2: Risk Assumption Versus Risk TransferHow much would you expect a CPA to charge to “bless” a SEPP plan I had already developed? How much for a tax attorney?
Tim2005-02-24 08:02, By: Tim, IP: [146.122.201.151]

L2: Risk Assumption Versus Risk TransferHello Tim:
Just for a blessing; e.g. an opinion letter, I would think an independent CPA would charge from $300 to $1,000 depending on the complexity of the situation.If the CPA is with a big firm, 2x to 3x. A tax attorney might be 2x to 5x, again depending on whether (s)he is a sole practioner versus a member of a firm.
TheBadger
wjstecker@wispertel.net
2005-02-24 08:28, By: TheBadger, IP: [66.250.23.21]

L2: Risk Assumption Versus Risk TransferWell said, Bill. I tend to agree with all you said except …
Many individuals are thoroughly capable of designing and implementing their own SEPP programs; an equal number are not.”
Where you initiallycredit 50% of the population with the ability to accuratelyestablish a SEPP program, I tend to rely on the “10 / 10 / 80 Rule” which states:
10% are perfectly capable of doing everything right with no additional help
10% think they are perfectly capable of doing everything right with no additional help, but
80% know they need help and will seek adequate help.
I also agree with your new position that a CPA or Tax Attorney should be included in setting up aproper SEPP program.
Jim2005-02-24 08:51, By: Jim, IP: [70.184.1.35]

L2: Risk Assumption Versus Risk TransferHello Jim:
Originally, I would have agreed with you & in-fact did agree; e.g. some derivation of Pareto’s Law applied; 20% of people / situations cause 80% of the problems. However, my unscientific measurement of real life transactions is now suggesting that this does not apply. Instead it seems that somewhere around 50% of the taxpayer’s launching a SEPP plan are getting it wrong to some greater or lesser degree. Sometimes the “wrong” is a planning issue phrased as: “If only I had known, I would have done it differently”. The other “wrong” (and the greater frequency) is: “Someone in authority (most often the IRS) is saying I really did it wrong (therefore pay $$$), can I fix it.”
TheBadger
wjstecker@wispertel.net
2005-02-24 08:58, By: TheBadger, IP: [66.250.23.21]

L2: Risk Assumption Versus Risk TransferUsing my numbers, 90% create problems and only 10% get it right. I will yield to your studies showing only 50% screw it up.
JIm2005-02-24 10:25, By: Jim, IP: [70.184.1.35]

L2: Risk Assumption Versus Risk TransferI wonder if both of your numbers are skewed. If someone had done their SEPP correctly on their own, they would not need to contact you. So how do knowif you are only hearing from people that have made mistakes? Perhaps there are many people that have done their SEPP correctly and never needed to contact you, so they would not show up in your numbers.
Tim2005-02-24 13:50, By: Tim, IP: [146.122.201.151]

L2: Risk Assumption Versus Risk TransferHello Tim:
You are absolutely correct. My sample is limited, half memory, half notes. Further, as you have pointed out, a true sample would somehow include those people not calling. However, on the flip side, I have noticed a material (as in 2x – 3x) increase in the number of people calling who have problems.
TheBadger
wjstecker@wispertel.net
2005-02-24 13:54, By: TheBadger, IP: [66.250.23.21]

L2: Risk Assumption Versus Risk TransferTim… As the Badger stated, he and Idon”t agree on this one and I have a tendancy of taking your side.
Someome who is willing to invest a little time can do what is necessary to successfully implement a SEPP – for others, a professional advisor ”may” be essential.
We only see the problems, not the stories of success. Just my thoughts.
Gfw2005-02-24 13:58, By: Gfw, IP: [172.16.1.71]

L2: Risk Assumption Versus Risk TransferA few more thoughts_ I can definitely believe that the number of calls that you receive has increased and that because of the nature of individuals, that you would receive more calls from the problems’ than from others.
On a slow day, the site is visited by somewhere between 400-500 individuals every day. On a good day, the number frequently jumps well over 1,000.
We are number one in several of the search engines, get referrals from the IRS and from many of the brokerage houses. Since you handle a variety of the tough questions with really god answers and your contact information is readily available, you’re bound to get more off site contact from the people in trouble.2005-02-24 14:11, By: Gfw, IP: [172.16.1.71]

L2: Risk Assumption Versus Risk TransferI think “we” … me included … are heading away from Bill’s main point by focusing on the numbers of problem 72(t)’s instead of who eats the blaim and pays the piper for the financial costs of an error.
I am neither a CPA nor an attorney, but a Financial Advisor. My E&O insurance doesn’t cover me for giving tax advice. If I screw up a 72(t) plan which costs my client taxes, penalties and interest, thentheymay have a legitimate claim for damages. However, all of the documents my clients sign clearly state that the client assumes full responsibility for all calculations and that they are stronglywarned to “seek the advise of a competent tax professional either a CPA or Tax Attorney.” I don’t know whether this wording … and it’s a lot more extensive that this short statement … is adequate to protect me or not. Fortunately I haven’t had any problems so far.
What if an individual only uses the information on this site and the posts to this board to set up and execute their own 72(t) plan, and something goes wrong? Do they have any recourse against Gordon or the site? Good question.
Bill’s point, Ibelieve,is that only tax professionals should be giving “official” tax advice, and these are the people who have the E&O insurance to protect them against goofs. As an advisor I may make some “preliminary calculations” for a client, but before implimenting any more SEPP’s I’m going to send my clientsfor areview from a local CPA that I know knows what she’s doing, and can give the official “opinion letter” Bill referred to earlier.
Jim2005-02-24 14:51, By: Jim, IP: [70.184.1.35]

L2: Risk Assumption Versus Risk TransferOur disclaimer has a few more words and like everything else on the Internet the site doesn’t offer specific advice nor do our answers in the discussion area. Our disclaimer can be found at http://72t.net/MN_About.aspxHowever, I do feel that a person of average intelligence thatis also willing to do a little reading and study can set up a basic SEPP plan.
I guess if you and Bill are right, I should take down the siteor only sell professional services – I’ll have to think a little on this one2005-02-24 15:09, By: Gfw, IP: [172.16.1.71]

L2: Risk Assumption Versus Risk TransferGfw, The Badger, Jim, and all other participants of this board:
This siteisa wonderful resource forestablishinga 72t plan.
It worked flawlessly for me and I am sure it has worked for others as well.
Therefore, I owe a vote of much thanks to Gfw, The Badger, and Jim for all of their posts to date… and to all of the other participants that asked the right questions over the years as well.
Just had to add this positive in an apparent storm of controversy.
Thank you so much,
gus2005-02-24 17:39, By: gus, IP: [206.149.200.26]

L2: Risk Assumption Versus Risk TransferGentlemen,
I for one have benefitedgreatly from your website. I am planning to start my 72t in one year. I have ordered and am looking forward to receiving Bill’s book.
As mentioned, your disclaimer is right there on the home page for all to see.
Jeff2005-02-24 21:25, By: Jeff, IP: [12.151.162.12]

L2: Risk Assumption Versus Risk TransferMy two cents:
This IS the best site on the web regarding 72(t) SEPP’s. When I set out to set up an SEPP for myself, it didn’t take too long to see that. But due diligence really requires a LOT of homework if one is to set it up on their own. I went to many sources, read a lot, made sure that any data I was going to depend on was corroborated (sp?) by many sources, including the irs.gov site. I didn’t stumble on this site until I had already done a lot of homework, and it was still immensely valuable for feedback, and more learning. I feel comfortable doing my own because I’m keeping it simple: one entire IRA, I will never touch it, using a large custodian and they did the calculations for the withdrawals, (which jive with the calculators available on this and other sites), straight amortization method, no problem exceeding the 5yr. or 59 1/2 rule, etc. Had I known about this site in the beginning, I would have bought Gfw’s book, it would have saved me some time in research. I guess I’m in the 10, 20, 50 or whatever percent, but if I had any ‘unusual’ or complicating factors at all, I would definitely do what TheBadger is suggesting as far as getting some insurance, and I would get Gfw’s book; there is no other comparable book on the market that is a comprehensive source on just this topic. As what was said before, there is no upside at all to any mistakes when making a commitment like this.
And thank you, Gfw and TheBadger, for taking the time to answer questions.
Rick S. 2005-02-25 03:48, By: Rick S. , IP: [69.231.199.29]

L2: Risk Assumption Versus Risk Transfer> However, on the flip side, I have noticed a material (as in 2x – 3x) increase
>in the number of people calling who have problems.
Is it also possible that due to the unemployment/economic conditions during the last several years that more SEPPs are being created than in previous years?
I would also like to thank all the contributors to this site that I learned from as I set up my SEPP. It is an awesome site and I return weekly to check on the latest news.
And I too went very straightforward with my SEPP: one IRA, no plans to recalculate, used less than 120%, etc. I would add though that I will be very happy when my five year time is up!2005-02-26 21:10, By: JCK, IP: [65.59.93.186]

L2: Risk Assumption Versus Risk TransferGood morning Gordon, Bill and all others. I had a meeting out of town Friday or I would have responded sooner. I attended a one-day training session for a very comprehensive financial planning software program I run, and was happy to find a link to this site in the program’s section about 72(t).
No Gordon, I don’t think there is any reason to take down this site. You have your disclaimer and, if my understanding is correct … not a legal opinion since I’m not an attorney … this board and comments thereto, and your site are also covered by something called The First Amendment to the US Constitution. I haven’t seen any posts that would be considered false and misleading designed to do harm to anyone. Besides, if something does post in error, eventhough believed by the poster to be correct, someone with more knowledge and understanding is quick to correct the error. Boy do I know that feeling … thanks guys.
Bill’s book is a fantastic reference. If you don’t have it, get it, especially if you deal with 72(t) situations on a regular basis.
Let me clarify my position on DIY 72(t)’s. I do believe there are some people who are fully capable of learning what they need to know to successfully set up and run a 72(t) plan, to include managing the investments. If you fit this category, go for it! You don’t need to waste your money with either CPA, attorney or financial planner fees. Whether it’s 10% or 50% or some other number, I know there are people who really don’t need someone’s help and they really should just DIY.
However, if someone needs or just wants the assistance from one of these professionals, then by all means seek out someone who is capable of helping with the entire plan. What I have learned in this whole discussion is that in my practice I need the assistance of someone with the proper “tax credentials” and E&O Insurance coverage to “officially” set up the plan. It’s not that I don’t know what to do, I just can’t afford the liability involved. So I’ll be working with a local CPA whom I know knows what she’s doing, even if I have to teach her some of the finer points which we have discussed here.
Hope this clears the air from my perspective. Gordon and Bill and all others, please keep up the good work because I believe we have the largest corporate knowledge on this subject around.
Jim2005-02-28 08:47, By: Jim, IP: [70.184.1.35]