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Hello
- 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
Retired from the military about 6 months ago, pension is generous but not enough for my current lifestyle, and I still want to work part-time. I am trying to achieve a balance between working when I want and also having a cushion of money for big expense items.
I have a TSP index account that I am planning on rolling over to a Vanguard traditional IRA, probably the Total Stock Market Index Fund. I'd like to set up a 72T arrangement using TSP, but my understanding is that it is pretty painful to do.
So just so I have this right if I take distributions this year,
1. My age for the life expectancy is the age I will be at the end of the year?
2. Am I required to withhold? I live in WA state, so the state I don't think requires it. If I do a quarterly estimate, how would that work?
3. Just to simplify, I am planning on taking the distribution all at once, annually. Good idea or bad?
4. I had read that I should be setting up a brokerage account in Vanguard that I can sweep into after selling my stock, and then have that money transferred to my bank account. Is that the correct way of doing things?
5. I'll just say, I've used multiple calculators and they all give slightly different answers. I am assuming some of these calculators just haven't been updated with the latest regulations? I would of course go with the calculator that gives me the smallest distro. In any case, would it just be safer to use a smaller interest rate that will get the funds I need?
Thanks for any and all input!
1. Yes, your age at the end of the year is what you use.
2. I always had taxes withheld from my distribution - I used a tax program to estimate the year's taxes & determine how much should be withheld. My taxable income was pretty stable during my 72t plan so the amount withheld didn't vary much from one year to the next. If you don't withhold then you'd have to file quarterly estimated taxes; I don't have any experience with that.
3. One annual distribution is how I did it also. It worked out fine for me; as long as you are disciplined in your spending & can make the money last all year it's not a problem. As you say, fewer withdrawals means fewer chances for a mistake to happen.
4. Most years I sent the cash from my IRA directly to a savings account at another bank; there were never any issues with that. I suppose the one advantage to using a Vanguard brokerage account is that if the wrong amount of money is transferred out of your Vanguard IRA the money is still at Vanguard so there might be an opportunity for Vanguard to fix things & not break your 72t plan; if you move the money directly to a different bank that might be more difficult.
5. I don't know why you would get so many different answers. Assuming you're using the amortization method in each case and you're using the same starting values (age, interest rate, and IRA balance) you should get one of 2 answers depending on whether the calculator was updated with the new rules or not. When I set up my plan back in 2017 I used the calculator here, one other online calculator (which I can't recall now), and I did it myself by hand; I got the same answer from all three so I was pretty confidant I had the right answer.
As for the interest rate, yes I would reduce the it to get the desired withdrawal. You could also split your IRA to reduce the starting balance. The advantage to doing that is you have money outside your 72t plan as a backup, but since you're only using 1/3 of your retirement savings for your 72t plan you already have that.
@gryphon Thanks for the reply. BTW, did you hire a CPA to look over your plan at all?
@larryh No. I read Mr. Stecker's book (linked here under the Tools & Resources heading), so I was pretty confidant in my plan.
One other thing you should think about is inflation. I had enough cash set aside when I started my 6 year plan that I was able to increase my spending every year to keep up with inflation even though my income from my pension & 72t withdrawals did not change. Your 72t plan is going to end in May of '32 so you need to plan for 9 years of inflation - how will you handle that?
@gryphon It's a consideration, however, if I really need to work more, I am in a fortunate position where I can do that. I'm probably not going to really retire for at least another 10 years. I may even continue beyond that.
I basically agree with gryphon's response, except that monthly or quarterly distributions spread out the cash flow needs for the portfolio to generate or for you to sell securities at the higher or lower level in January. The same re the cash needs for the federal income taxes to be withheld.
BTW, if you do go back to work or do Independent Contractor services, you can still contribute to a 401-K or IRA (or both) to offset the taxability of those earnings, even while taking the required annual distributions from your SEPP 72-T. This will depend upon your tax situation each year. You will be required to continue SEPP 72-T distributions until you are 59 1/2, which is about 10 years. A lot can happen either physically, financially, or with the tax system on this time period. Also, as mentioned already, inflation and health insurance costs will become a factor. Therefore, I would suggest having other funds available for flexibility.
@dlzallestaxesmsn-com Thanks for your response. You think it makes more sense to spread things out as opposed to once annually?
Regarding the length of the SEPP, that's why I am thinking long and hard about this. I have other funds available, most of them are locked up in other IRAs, I could sell a vacation home in a pinch if I really needed to. I think this will probably be okay, but I am understanding that this is pretty irrevocable once you do it, so I am trying to be as informed as possible.
The penalty for "busting your plan" are very severe. The requirement is to maintain the plan EXACTLY for the longer of 5 years or to age 59 1/2 (your case). The penalty would be retroactive on ALL DISTRIBUTIONS taken prior to age 59 1/2 if you CHANGED OR STOPPED the distributions before age 59 1/2.
Therefore, it is best to keep a "safety IRA" (or non-retirement assets) to help to fund any shortfall in cash needs. You could possibly take a "home equity loan" or "line of credit" instead of selling the vacation home. You could also sell non-retirement investments.
