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Date to determine balance for withdrawls


livingthedream
Posts: 15
Topic starter
(@livingthedream)
Estimable Member
Joined: 6 months ago

 

  • Date of Birth: 11/1969
  • Age:51
  • 72t Method:  Amortization
  • Life table: 33.3
  • Stub Year*: No
  • Annual Recalc*: Maybe?
  • AFR* Rate: 1.28%
  • Balance(s)*: $1.9m for account to be used for SEPP; $360,000 between traditional IRA and Roth IRA

I'm hoping to start my SEPP asap. Planning to take the first year as a full year withdrawl. I will consider myself mostly retired after June (I'm a teacher) but may opt to do some part-time work for a while, maybe 15 hrs./wk. My question is on the sample SEPP form on the website it recommends using Dec. 31 of the previous year as the date to determine account value. My account has grown considerably since then (made some good stock trades) and I would like to use the value of the account now. Is there a reason why I shouldn't do that? I think it shows a real valuation of my account as I have it more conservatively invested now and also have a considerable portion in cash for now.

In addition I see on the template it was asked if I plan to reconfigure each year. I would like to assuming the federal mid-term rate continues to increase. If I use the amortization method can I reconfigure each year with the current mid-term rate?

Anything else I should be considering?  Thank you! This website is invaluable. I've spoken to a tax accountant, as well as a tax lawyer who works on estate planning, and neither could help me with this. I also spoke to someone at TD Ameritrade who wanted to set me up with their other division who could handle this but then I would of course have to hand over the account for them to handle. No thanks. This site has helped me to feel ready to do this.

 

8 Replies
dlzallestaxes@msn.com
Posts: 132
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 2 years ago

I think that you misunderstand the "instructions".

The balance to use for your FIRST YEAR (and all years if you don't "recalculate") is the balance at the end of any month (but any day is also allowed, with documentation) which is within a "reasonable time" before the month that you start. This usually has been up to 6 months after that date, i.e. an 11/30/2020 valuation could be used for any starting date up to 5/31/2021. Obviously you would want to take the highest valuation date within 6 months before you start. USUALLY a month-end valuation is used because it can be easily documented with the month-end statements.

You did not indicate how much you want/need after taxes. I don't understand what you mean by the following info. Please clarify.

  • Balance(s)*: $1.9m for account to be used for SEPP; $360,000 between traditional IRA and Roth IRA

Also, you have to consider the allocation between IRA and ROTH IRA in order to determine the taxability of your distributions. Further, what is the additional amount between the $ 360K and the $ 1.9 M ? (403-B ? )

If you decide that you want to use the "recalculate" option, then you must always use the 12/31 valuation or all future ANNUAL AMOUNTS. That is where the 12/31 valuation date is used AFTER THE FIRST YEAR. The only caveat is that the Stock Market can go down, and then you would be "stuck" with lowering your distributions for the following year.

Have you considered NOT setting up a SEPP, and using the ROTH IRA for distributions for the next 8 years TAX FREE. Further, if you expect to have limited income, then you might consider doing ROTH CONVERSIONS (TAXABLE AT 12%). You didn't indicate if you are single or married. There might even be consideration of doing ROTH CONVERSIONS up to the limit of the 24% tax bracket if your beneficiary(s) are your children, if any, because of the SECURE ACT requirement that they will be required to distribute their inherited IRA and/or 403-B WITHIN 10 YEARS OF THE YEAR AFTER YOUR YEAR OF DEATH. (The IRS clarified their misinterpretation of this provision earlier today.)

Don't be surprised that Estate attorneys know nothing about SEPP 72-T plans, and only a limited number of tax accountants are knowledgeable about them also. That is why this UNIQUE website was established a number of years ago, and fortunately someone "picked up the gauntlet".

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livingthedream
Posts: 15
Topic starter
(@livingthedream)
Estimable Member
Joined: 6 months ago

Thanks very much for your reply! I think some of the confusion is due to the template having changed. I do remember seeing amounts needed before/after retirement, marital status, etc. The new template doesn't show these items anymore. To answer those questions:

I am single (divorced) and file as head of household as I have children at home that I can declare as dependents.

I need to have approx. $70-$75,000 annually once I being withdrawing from the SEPP. I will still be paying mortgage payments so my income needs will not change much for some time. Again, I may opt to still have some part-time employment for a bit and if I end up with anything extra it will just get reinvested.

The SEPP is in its own IRA valued at approx. $1.9m right now. My other accounts are a Roth IRA, another traditional IRA, and a very small cash trading account. It's those other accounts together that total approx. $360k.

The Roth was only created this Jan. 2021 (and only has approx. $20k currently) so the only amount I can take from it is the contributions (which I think was $5k) until my 5 year waiting period is up, unfortunately. Most of the money outside of the SEPP IRA is in a traditional IRA ($340k). I will use that for emergencies and college tuition payments. I have been considering doing a Roth conversion over time. Perhaps $20-30k a year or so. I was researching that and it looks like I can even do that with the SEPP (although I would have to create a separate Roth as it would now be in my SEPP universe if I understand correctly). Although of course I should start with the non-SEPP IRA first and even at $30k that would take me over 10 yrs to convert. I will spend some more time figuring out what my tax would be if I convert a larger amount. Looks like the 24% tax bracket is $85-$163k.

Honestly this is a complete shock to me that I'm even able to consider this. I've been trading stocks on my own and saw my account plummet (like everyone else with stock accounts) last March. With some lucky trades I went from a little less than 100K to what I have now. I'm thrilled as I have a need to be around more for my youngest and this will allow me that freedom. I just wish I had the knowledge to have put the money into a Roth when it was very low. I have put my SEPP into much more conservative investments now to preserve it. All of this is very new to me and my head has been spinning trying to understand the tax implications of everything.  I appreciate your help very much! 

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dlzallestaxes@msn.com
Posts: 132
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 2 years ago

Did you use the "reverse calculator" to determine the MAXIMUM amount hat you should put into your SEPP 72-T account to generate the $ 70- 75K that you say that you need annually ? You didn't say if you want that net of taxes being withheld on these distributions, or if you will be paying estimated taxes from those withdrawals.

One of the EXCEPTIONS from the 10% EARLY DISTRIBUTIONS from IRA accounts is HIGHER EDUCATION EXPENSES (code 08), including Tuition,  fees, books, supplies, equipment, computers, and Room and Board. Therefore, these expenditures should be made from your separate TRADITIONAL IRA account, but NOT from a SEPP 72-T, which I think that you said was your plan.

If you are healthy and "insurable", I suggest that you buy 20 or 25-year TERM Life insurance because of the SECURE ACT. Assuming that your kids ( 2, 3, 4 ?) are the beneficiaries of your $ 2,240,000 IRA accounts, upon your death, they will be REQUIRED to distribute ALL of this IRA money within 10 years after the year following your year of death. While this does not mean equally each year for 10 years, the longer they wait to take the distributions, the greater the amount that will be required in later years. Also, with "normal" growth at 6% - 8% per year, this amount will double OVER THAT 10-YEAR PERIOD. They will need the TAX-FREE proceeds of the life insurance policy to pay the federal (and state ?) income taxes on these distributions which will probably be at a high tax rate because it will be on top of their earnings at the peak of their careers.

Since you have been a teacher, I am surprised that you have not been contributing to a 403-B plan at work.

Your situation requires your working with an experienced team of Estate and Financial Planners, and a tax professional. They would work with you in doing FINANCIAL and TAX PLANNING. Also, you should probably consider TRUSTS to be set up for each child as the BENEFICIARIES of your IRA accounts. 

The complexity and comprehensiveness of all of this planning is beyond the scope of this website, and I have to get back to preparing tax returns, and extensions, for my clients.

 

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1 Reply
livingthedream
(@livingthedream)
Joined: 6 months ago

Estimable Member
Posts: 15

Thanks very much for your reply and being so generous with your time. I'm very appreciative especially given how difficult it has been to find someone who is knowledgeable about SEPPs.

I think I'm covered on all of these bases and I appreciate you asking about them to be sure. I've only been a teacher (for what it's worth, I'm a woman) for 6 years and because I wasn't in long enough qualify for the pension (min. was 10 yrs) I rolled over the small amount (district only added 1% and I was required to add 3%) to my traditional IRA. I didn't add any more to my TIAA-cref at work because I don't like TIAA-cref as they don't have much in the way of funds for investing and because they are too limited on what they allow for withdrawls. I was frankly happy to be able to roll the account over. I switched to another district to a part-time temporary position during covid which doesn't give me any retirement benefits (other than paying into social security) so I was able to roll over the account. I also did a lot better investing on my own then keeping it in the fund available to me at TIAA-cref.

When I talked with a tax lawyer just for advice, he did talk to me about trusts for my kids and I do eventually plan to take care of that. 

At this point I do plan to make education expenses from my other non-SEPP IRA as it should be large enough. However, I did look into taking it from the SEPP and found that it was allowed also. I found the ruling in this case: Gregory and Kim Benz v Commissioner of Internal Revenue. https://taxlaw.typepad.com/files/benz2.tc.wpd.pdf. I'm just relieved knowing that in case I do decide I need to create a large SEPP, or another one, and then take education expenses out as well from there.

I do like the reverse calculator and have used it. I'm being conservative in what I will take since I'm not certain of the exact amount I will need. I figure I can always create another SEPP if needed. Right now I'm considering making my SEPP IRA only the amount needed for 60K as I've been playing with figures and what I will need. Before I officially start the SEPP I will run the numbers through the calculators again. Those are really useful!

I sincerely appreciate the info. about the term life insurance. One last questions: would another way to do that be to start the Roth conversion process, then in 5 years when I can start withdrawing my contributions from it start using that to pay the taxes on converting the rest over time?

Thanks again!

Reply
marcusIII
Posts: 3
(@marcusiii)
Eminent Member
Joined: 6 months ago

Hello,

Quick Question.

If the OP is 51, would he need to use the 2022 tables and have Life Expectancy of 35.3 ?

Reply
dlzallestaxes@msn.com
Posts: 132
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 2 years ago

NO. If he starts he SEPP in 2021, he must use the current life expectancy. For 2022 and future years, ALL life expectancies must be changed to the new tables, and even the SEPP distributions which are supposed to be the same each year will be required to be changed to the longer life expectancy factor, which will reduce the annual distributions going forward.

Reply
dlzallestaxes@msn.com
Posts: 132
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 2 years ago

ROTH CONVERSIONS are an excellent tax planning, retirement planning, and Estate planning approach. I have my clients targeting conversions up to the limit of the 24% tax bracket, which is only a 2% higher tax for a significantly higher taxable income limit.

BTW, distributions from ROTH IRA accounts are never taxed up to the amount that was either CONTRIBUTED or CONVERTED into the account. Only the increase from income or growth/appreciation is taxed if distributed within 5 years of the account being created, or within 5 years of EACH CONVERSION. There are other rules re age 59 1/2, etc. that you can look up.

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1 Reply
livingthedream
(@livingthedream)
Joined: 6 months ago

Estimable Member
Posts: 15

Thank you for your response! I appreciate the info. about the tax bracket to target for conversions. Very helpful!

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