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About to take the plunge, can you double check my work?

10 Posts
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Posts: 14
Topic starter
(@larryh)
Active Member
Joined: 1 year ago

Rolled over my TSP to Vanguard Traditional IRA. Right now the money is sitting in a settlement fund, so I plan to convert everything over to Vanguard Total Stock Market Index Fund. 

  • Date of Birth: 11/25/1972
  • Age: 50
  • Married
  • Annual cash needed year 1 (after taxes): $30,000
  • Annual cash needed later years (after taxes): $30,000
  • How are you planning on paying taxes? (withholding or quarterly estimates): Unsure
  • 72t Method: Amortization
  • 72t Distribution Start Date: 03/01/2023
  • Life Table Used: Single
  • Stub Year (Y/N): No
  • Annual Recalc (Y/N): No
  • AFR Rate: 4.62%
  • 72t Account Balance(s) with account type (traditional IRA, Roth, SEP-IRA, SIMPLE-IRA, 401k, 403b, etc.): 550,000
  • Describe other assets: Cash ~100,000, other retirement accounts ~$1M

Just so I am tracking, I can use up to the previous 2 months' interest rate correct? So I will convert it over, then in a couple of weeks I will withdraw the money into the settlement account, and then transfer that to my bank. Is there anything that I should communicate to Vanguard?

9 Replies
Tracy
Posts: 32
Admin
(@tracy)
Eminent Member
Joined: 5 years ago

Hi Larry,

According to the SEPP Distribution Calculator on this site, $550,000 at AFR 4.62% with life expectancy factor of 36.2 amounts to an annual distribution (via amortization method) of $31,563.68. 

As of January 2022, you can use “any interest rate that is not more than the greater of (i) 5% or (ii) 120% of the federal mid-term rate...for either of the two months immediately preceding the month in which the distribution begins…”, so your AFR looks to be safe.

Yes, you want to sell the stocks first and then make the withdrawal from the settlement fund so you can withdraw exactly the amount to want. If you plan on withdrawing the full amount towards the end of the year, keep in mind it may take a few days for Vanguard to move the money into the settlement fund. 

Vanguard does not provide any help or advice on 72t plans and will send you a 1099-R with a code of 1 (Early Distribution, no known exception) at the end of the year, so you will need to submit form 5329 with your tax filing next April.

You'll need to continue with your 72t withdrawals for 9 years until 05/28/2032 when you turn 59 1/2. 

Good luck!

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2 Replies
(@larryh)
Joined: 1 year ago

Active Member
Posts: 14

@tracy Thank you so much! One last thing, if I am reading correctly, basically anything below 5% is safe right?

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Tracy
Admin
(@tracy)
Joined: 5 years ago

Eminent Member
Posts: 32

@larryh Correct...during periods when the AFR is below 5%. If/when the AFR creeps up above 5%, then 72t plans could use that percentage instead.

As a caveat though, 5% or more may be a little high. Anyone considering taking 5% distributions should do projections to make sure they don't wipe out their retirement plan. This may not apply to you, Larry, since the IRA you're targeting for the 72t is not your only retirement plan, but I wanted to mention it. Back after the year 2000 many folks who used aggressive AFRs in their 72t plans wiped out their retirement plans because their distributions were higher than the returns in those accounts. You can read about the history on this website: What is an AFR and how do I pick one?

Tracy

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Posts: 193
(@dlzallestaxesmsn-com)
Estimable Member
Joined: 5 years ago

You should decide NOW whether you will have the federal income taxes withheld from every distribution, and remitted to the IRS by Vanguard, and the difference between $ 31,563.68 and the amount withheld sent to you, OR have -0- withheld and the full $ 31,563.68 remitted to you, and then you submit the required ESTIMATED TAX for 2023 no later than 4/18/2023 (which can be included with the estimated tax on other taxable income that you may have). Your timing is rather short for you to get everything set up for 3/1/2023. Vanguard does not have someone dedicated to waiting for you to send in the instructions, and expecting it to be executed the next day.

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2 Replies
(@larryh)
Joined: 1 year ago

Active Member
Posts: 14

@dlzallestaxesmsn-com I want to just take an annual distribution. Having Vanguard do it sounds painful. I’d rather submit my own estimate, but what form is that? Also, why do I need to do that this year, wouldn’t all this be for years taxes and not due until next year? Obviously, I have some ignorance on the finer details here.

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(@larryh)
Joined: 1 year ago

Active Member
Posts: 14

@dlzallestaxesmsn-com Thanks for the information. If I have Vanguard do it, how much of a percentage should I have them send to the IRS?

If I take a on a one time annual distribution, would I still need to submit the estimated tax every quarter? For instance, I take a distro sometime in March, I send the estimated tax of the entire amount, why should I then have to do submit estimated taxes for the remainder of the year, if I've already paid the entire amount?

 

 

 
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Posts: 193
(@dlzallestaxesmsn-com)
Estimable Member
Joined: 5 years ago

When taxpayers are employees, they have federal (and state) income taxes withheld from their paychecks, and remitted to the IRS (and state) by their employers. If they have outside investment income, then they are usually required to submit estimated tax payments "quarterly", as of 4/15, 6/15, 9/15, and the following 1/15 on the income for the CURRENT YEAR. Taxpayers who are Self-Employed Independent Contractors are similarly required to submit estimated tax payments (with the voucher form 1040-ES) on their business income. When someone retires, taxpayers are required to either have taxes withheld from their retirement income and Social Security benefits, or to submit quarterly estimated tax payments. When they file their tax returns on 4/15 of the following year, they are required to pay the balance due between the total tax liability and the withheld or estimated tax payments made for the preceding year. You will be charged Penalties and Interest by the IRS (and state) if you do not make these payments on a timely basis during the year. The taxes are withheld on the income as distributed from your IRA (SEPP before 59 1/2 or Traditional after 59 1/2), or must be paid as Estimated Taxes on the dates indicated above. You are not allowed to wait until you file your tax return to remit the applicable taxes. If you have a tax professional preparing your tax returns already, then you should tell him of your plans for a SEPP 72-T, and he should then advise you whether to have the taxes withheld or he should prepare the Estimated tax form for this distribution for 2023 and future years in conjunction with the usual estimates that you pay on your investment income. If you have been preparing your own taxes, I recommend that you retain a tax professional to not only prepare your tax returns, but also to do TAX PLANNING, which could include ROTH CONVERSIONS. You should have him explain to you how the SECURE ACT 2.0 will affect ultimate inheritance of your IRA(s) by your wife, and then your children (or other beneficiaries) after her death. In addition, you should make sure to have all of your Estate Documents up to date, and do applicable Estate Planning, and consideration of incorporating a Trust into your Estate Plan. 

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Posts: 193
(@dlzallestaxesmsn-com)
Estimable Member
Joined: 5 years ago

You only have to pay estimated taxes for income earned in the periods ended 3/31 (Paid 4/15), 5/31 (Paid 6/15), 9/15 (Paid 9/15), and finally 12/31 (Paid 1/15 of following year). These payments are due on federal (and state) taxable income earned during that period for which applicable taxes were not withheld. Accordingly, if you have investment income, you have to file estimated tax payments for those, separate from taxes withheld on wages, pensions, RMD, or Social Security Benefits. Only in rare situations does investors have taxes withheld from investment income. If someone does not have investment income, then taxes can be withheld from all of the rest of this income, and no estimated tax payments are required. If you wait until you file your tax return to pay taxes on income that should have required withholding or estimated tax payments, then you will be subject to penalties and interest for "UNDERPAYMENT OF ESTIMATED TAXES".

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1 Reply
(@larryh)
Joined: 1 year ago

Active Member
Posts: 14

@dlzallestaxesmsn-com Alright, I think I am close to figuring this out, so bear with me. 

On March 3, 2023, I will sell $32000 of my traditional IRA mutual fund, which will then be placed in to a settlement fund, then sent to my bank. Before 4/15/2023, I will need to submit a 1040-ES, and based on my estimated gross income for the year, I figure about what tax bracket I am in, and then use that percentage against the $32000. So hypothetically, my estimated total income for the year would be 250,000, plus this 32000, which would be a total of 282000. That would put my effective tax rate around 20ish%, which it was last year. So based on that, I would submit the 1040ES and pay the IRS 6400. Since I will only take an annual vs monthly distribution, and I plan on doing it in March every year going forward, I only have to do this once a year before 4/15. Is my math correct?

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