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New 72t guidance might be coming before year end
Today I had a meeting with the IRS to discuss a Private Letter Ruling I requested for an alternative method for calculating SEPP. (I submitted the PLR request since interest rates are so low causing excessive limitation in withdrawal proportion).
They refused to make a determination on my PLR request on the basis that the IRS is in the process of revising Rev Ruling 2002-62. (At least I’ll get my user fee back).
They couldn’t give me a timeline, but it sounds like they are aiming for the end of the year.
Thought this would be of interest to this community.
Thank you for this update! Please post here if you see a revision. Do you have a good link for where to check for revisions? I'm not sure where to look and since I am very close to starting my SEPP I would like to know if changes have been made, especially with regard to determining the interest rate. The rate at the moment is so low that I've considered taking monthly withdrawls and paying the penalty in hopes that the interest rate increases. I just don't like tying the money up for what would be 7.5 years for me. If the interest rate made more sense, like at 3-4% it wouldn't be an issue for me. But at 1.2% I keep wavering on whether this makes sense.
I suggest that you give us your details if you want some informed responses. If you have very low taxable income, then the 10% penalty might be your only tax. Once you are in the 12% tax bracket, you will be paying 22% tax on your early distributions. Have you looked at the other Exceptions to the Penalty ? Maybe paying just the 10% penalty until you are 54.5 may make sense, and then use a SEPP 72-T for the 5 years from 54.5 to 59.5. I doubt that the interest rates will be 3-4% within the next 2 years. You have to look at Cash Flow, Financial/Investment Planning, and Taxes/Tax Planning.
You could also use the "half a loaf" concept, and put 50% of your IRA into a SEPP 72-T, and leave 50% in a separate IRA to take additional distributions which will be subject to the 10% penalty. You could plan based upon your tax situation. In the first calendar year (2021) you have several options, i.e. at this time, 100% of the annual amount, or 2 quarterly distributions in Sept and Dec, a semi-annual distribution between now at 12/31, or 4 monthly distributions. What are your cash needs and tax situation for 2021, and what are they for future calendar years ?
As far as your question, the posting 2 weeks ago said there might be an IRS issuance "by the end of the year". I hope that you don't plan to ask every two weeks if there has been any new information. You have to be patient.
You could also try to "time the market" by setting up an account with 25% of your money for the 1st plan, and setting aside 75%. Then at the end of 2022, or sooner if rates spike, set up a 2nd plan for another 25% or 50% or 75%, and then keep some for a 3rd or 4th plan. At the end of each calendar year, even in Dec., you can take 100% of the annual distribution for that year. This way you are playing the "wait and see" approach each year, while still being allowed to take the entire year's distribution.
Everything is relative. If someone has $ 1 million, and can distribute $ 25,000 a year from say 50-59.5, and only pay the income tax, and not an additional $ 2,500 penalty, then that might be their comfort level until 59.5. There isn't anything like the "ultimate" plan that fits everyone. I believe in the "sleep factor" for my clients -- if they can sleep after making any decision, then it is "right", and if they cannot sleep, then it isn't right. I always suggest keeping an emergency or contingency amount.
Regarding the AFR rates, specifically the recent low rates, and the pre-2002 “reasonable” rate, here is some information to guide us in developing SEPP distribution plans in the near future:
No one can predict the future (and I'm not an expert), but it seems that low rates may be here to stay for a while. The 72t AFR is loosely based on Treasury rates, and if you listen to Powell and the Federal Reserve, they’re not planning on raising Treasury rates anytime soon. According to this recent Forbes article, it could be 2023 before they start lifting rates. Since the prior low point in February 2009, the AFR has been hovering around the 2% mark for the past decade.
And regarding the “reasonable” rates from the late 1990s and early 2000s, I have a bit of commentary on the 72tNET.com page What is an AFR and how do I pick one? which includes this:
Historical note: Back in the late 1990’s folks were riding high on the stock market’s consistent double-digit returns and thought the boom would never end. The 12% expected return rate seemed reasonable back then, even to the IRS, who allowed AFRs to be any “reasonable” rate. Something very bad started to happen in 2001 after the stock market crashed – SEPP plans everywhere started to run out of money. Because of this nightmare, starting in 2002, IRS began to require SEPPs to use the published 120% Mid-Term AFR rather than allow folks to select their own AFR.
I think you might be misunderstanding the rules on which interest rate to be used. It's not 1.20% of the account balance, it's 120% of the federal midterm rate for either the current month or one of the previous 2 months. For example, if you’re calculating a distribution which will start in October, you can use either the August, September or October rate. Check the link above titled 'Applicable Federal Rate Table' for more information on rates and their usage.
I hope this helps you somewhat.
Michael, I apologize as I've mistaken the point you are raising. I see what you're saying with the account balance/annual distribution ratio and how they relate the the federal midterm rates.