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Hello All,
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.
@livingthedream my plan is keep checking https://www.federalregister.gov/ at least once a month. I’d search for something like “2002-62” (a reference to the current Revenue Ruling guidance). For example, I found the notice that they anticipate providing new guidance by using that search term and it’s was found in section V of this page: https://www.federalregister.gov/documents/2020/11/12/2020-24723/updated-life-expectancy-and-distribution-period-tables-used-for-purposes-of-determining-minimum (I’m pretty sure the was the notice the IRS attorneys were citing during my discussion).
@mcc637 Thanks very much for the link and where to look in the document. I see what you are talking about. This revision is not just the updated life expectancy tables, though, that are set to take place in Jan.? Do you expect the revision to be more than that?
If I'm not mistaken, I believe the initial law said one could use interest rates that were "reasonable" and then later that was changed to using the 120% of the federal mid-term rate. From your meeting did you get the sense that it will be revised back to something like a "reasonable" rate again or that they are looking at changes to the formula that would allow for a larger percentage withdrawl?
When I read that document in the federal register it sounds like they are just updating the tables so I'm not convinced that a revision will help those of us hoping to be able to take out a larger percentage from the IRA. I guess we will see!
The new "expectancy" tables were supposed to be effective as of 1/1/2021. But, because of the pandemic, the effective date was changed to 1/1/2022. This will increase the life expectancy by about .9 for each age, and decrease the annual required distribution.
@dlzallestaxesmsn-com And this has been another reason why I feel that perhaps I should have something in place by the end of this year to avoid that change.
@livingthedream The attorneys were, not surprisingly, vague. They basically said they could not rule on my PLR because new guidance is coming. When I asked how long it would take one referenced that the goal was to have it in place for the new life expectancy tables (therefore by the end of the year), with the disclaimer that they couldn’t be sure.
There refusal to rule was based upon “32.3.2.2 (07-09-2014)
Refusal to Rule or Deferral of Letter Ruling Pending Issuance of Published Guidance”.
I feel your pain and frustration with the low interest rates making 72t not as useful as it should be (and once was prior to recent ultra low interest rates). That’s the whole reason I went down the PLR path (as mentioned in the SEPP FAQ #9)
Without any specific evidence to support it, I’m hopeful that the new guidance will be more reasonable than what is available now. Using the Federal Midterm Rate might have made sense in 2002, but not now. I hope they figure out something more reasonable (like a simple cap based on age (life expectancy), not more than 4 or 5% of initial balance for example). If there’s a public comment period I’d like to give me 2 cents. If there’s a public comment period (I don’t know if there would be one), they usually last 60-90 days for many agencies. That could mean that we might a draft of the guidance soon, given there are only 4 months left in the year. (I am speculating here as I don’t know how public comment periods work).
@mcc637 Thanks again for the response. This sounds like the revision is indeed separate from the life expectancy table changes (changes which incidentally now don't make sense given that covid has caused life expectancy averages to go down slightly). I will keep an eye out for the change and hope that it helps to increase withdrawal amounts. Yes, making a simple cap seems to make the most sense rather than tying it to the mid-term rate. The whole point is to keep people from depleting their account which a reasonable cap would do.
I will also keep an eye out for a public comment period and will submit something if there is one.
@livingthedream After thinking about the comment period I looked into it more. It does seem that there should be one based on what I’ve seen for other revenue rulings (including 2002-62 which had “request for comments” in Intern Revenue Bulletin 2002-42).
So I’ll also keep an eye out on the bulletins which can be found at www.irs.gov/irb (keyword search “comment” or “notice for proposed rule making”).
@mcc637 I noticed the same last night. I was going to look into it further to see how far in advance that comment period happened prior to the ruling. If I see anything else I will post here.
@mcc637, thank you for your time and effort you're putting in to keep us all updated on this important topic. I have specific interest with the new IRS revision and how it will relate to the people that have a previously established SEPP plan. I've been taking SEPPs since 2019 and with this new revision in the works, I'm not sure if it will be mandated that existing SEPP plans be revised based on the new life expectancy tables. I've reviewed the draft revision and I don't see any language which addresses existing SEPP plans.
@twilliam Seems unlikely that it would be retroactive. Especially since it is not currently in there I wouldn't be too concerned. Again, given that the life expectancy rates have actually gone down since covid it seems like the incorrect time to be making this change. Rates will rise again eventually I'm sure, however.
@livingthedream, I agree with you that it's unlikely for existing plans to require changing. I also agree that it would make much more sense as you've stated (along with McC637) if the IRS allowed for a more reasonable method to be used. The federal midterm rates have been ridiculously low since COVID and mandating those rates for use with a SEPP plan is just not practical. A percentage of the overall balance with a simple cap based on age would work out very well for many people interested in using the SEPP option. I hope it works out for you!
Read the information in the "2022 CHANGES" at the top. I believe that is unlikely that existing plans will be "grandfathered" and not ahve to change their annual distribution amounts. To the contrary, it specifically includes current, as well as, future SEPP 72-T plans in the new calaculations as of 1/1/2022. Of course, the IRS could change its mind.
@dlzallestaxesmsn-com I did look at that and it says only the minimum distribution method would have to change. Those using the amortization method (which anyone doing this since interest rates have been so low would likely use since it results in a higher amount) "does not appear...[that they] will be required to recalculate their distribution amounts using the new tables."
This website is truly an amazing resource and I am truly grateful for the person who has taken the care to put it together and keep it updated. I have learned so much here!
@mcc637, thank you for your time and effort you're putting in to keep us all updated on this important topic. I have specific interest with the new IRS revision and how it will relate to the people that have a previously established SEPP plan. I've been taking SEPPs since 2019 and with this new revision in the works, I'm not sure if it will be mandated that existing SEPP plans be revised based on the new life expectancy tables. I've reviewed the draft revision and I don't see any language which addresses existing SEPP plans.
GO TO THE TOP AREA WHICH HAS TOPICS LISTED WHITE/BLUE (I'm colorblind) ON BLACK. IN THE UPPER RIGHT CORNER IS A LINK FOR " 2022 CHANGES ". THIS HAS THE WORDING THAT YOU ARE LOOKING FOR CONCERNING NEW AND EXISTING SEPP 72-T ACCOUNTS AS OF 1/1/2022. (It is too long to cut and paste here.)
The moderator of this FORUM had the foresight to set this up as a separate link because it will impact everyone's SEPP 72-T as of 1/1/2022.
@dlzallestaxesmsn-com, thank you for pointing that out. I'll give that a thorough review as well. As you've stated in your earlier post, we'll just have to sit tight for now and wait for release of the revision.
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.
@dlzallestaxesmsn-com Hi, thanks very much for your response! I was only commenting on the topic about the possible revised ruling. I previously filled out the form with my specific details in an earlier post when I was looking for answers to my specific concerns at that time. That was a while ago.
I appreciate your suggestions! My plan is absolutely to split my IRA and I already have in anticipation. At this point I'm just playing with the numbers to be sure it makes sense. I may just take the small amount I need until the end of this year (around $30,000 at this point) and pay the 10% penalty while waiting to see what this revision is. I get very nervous tying up the money for so long. I like your thoughts on doing only half as a SEPP and very much appreciate the suggestion! That's the kind of thinking I've been playing with. I certainly will not tie up everything and no more than 75% of my total IRAs will be in a SEPP IRA. Even if the interest rate doesn't change hopefully my balance will have positively changed a bit by the end of the year which would increase what I would take.
I understand that the federal mid-term rate won't likely change to anything like 3-4% anytime soon, and am only commenting that the current rate (which is actually higher than it was last year when it was under 1%!) almost makes the idea of a SEPP useless. I know there are so few people doing this that the IRS doesn't want to change it, but I had a shred of hope that maybe they were going to change the formula. Going back to a "reasonable" rate or just outright saying no more than 3% would make SEPPs reasonable again! Otherwise you are tying up a lot of money for a relatively small withdrawl amount.
@livingthedream If you need to take a distribution while waiting for this decision, don't forget that there's a 60-day rollover window. If taken today, you would have until mid-November to deposit it back in case new guidance does come out that changes things for you.
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.
@dlzallestaxesmsn-com Absolutely! I have had that thought as well. I think I may have read that suggestion in another post and have played with that idea. I will consider that again. Thanks very much!
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.
@tracy I understand that the federal mid-term rate is unlikely to change much. That is exactly why people are saying it doesn't make sense to tie the SEPP interest rate to the federal mid-term rate (and why the other poster tried to get a private letter ruling on using a different formula). A simple cap of somewhere between 3-5% is what people are suggesting. I agree that 12% is much too high and would be likely to deplete an account. At the same time the current 1.2% (or Sept. 1.03%) is so low that it doesn't make sense.
As an example, to get $50k one would have to put aside about $1.35m at my age (almost 52). When Feb. rates were just 0.54% that person would have needed $1.52m then. Contrast that with an interest rate of 4%. Now it would only take $911,000. Many might think it makes more sense to just pay that $5k penalty so as not to tie up those funds for too long. The less you are looking to take out the less a SEPP makes sense. If someone only has $1m it is the difference between taking out about $36K or $54K. Neither should deplete the account but why make it so you can only take out $36K? At that point it would make more sense to pay $3,600 penalty and not tie up the whole account in case you have emergencies. Or take out whatever you need.
Hoping that the IRS is making a change to the formula so that 3-5% interest rate is doable. That's what the other poster hoped the IRS might be hinting at and therefore why they refused to make a ruling for him/her.
@livingthedream These historically low rates are frustrating for those of us trying to maximize our distribution, but aren't they actually already at 3-5%/year? Unless I'm misunderstanding, the distributions are not actually 1.20% of your account balance. Using your examples at 1.20% midterm AFR I get:
50,000 / 1,350,000 = 3.7%
50,000 / 911,000 = 5.4%
@nhp920 Hi Michael,
Thanks for making that point. Yes, that is true and I hadn't looked at it that way. I did start a small SEPP last month. I decided that made the most sense for now and I can always start another one in the future which I likely will in Dec. or Jan. rates may be slightly higher. It looks like my first SEPP is 3.66% of the balance ($34,695.75 annual withdrawal on a $947,815 balance). As you said, frustrating when we are trying to maximize the distribution and when previous rates were significantly higher (this is when the Fed chose to tie SEPPs to the federal mid-term rate). But certainly a safe withdrawal amount and at the minimum 3-4% which I suggested was a "reasonable" amount. Thanks again!
Hello Michael,
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.
- T
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.
- T
