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- Date of Birth: 06/16/1971
- Age: 48
- 72t Method: Amortization Method
- 72t Distribution Start Date: Oct 10, 2019
- Life Table Used: Single expectancy
- Stub Year (Y/N): N
- Annual Recalc (Y/N): N
- AFR Rate: 2.5 % (July 2019 rate)
- Account Balance(s): 885,000
-
Questions: Have calculated SEPP using amortization method using my 401K account with single expectancy (36 factor from IRS table), with AFR rate of 2.5% and investment rate of 4%, the distribution amount is $37,569.65 and would like to start distribution this year Oct 10, 2019 to last 11 years? Please check if my calculation are correct?
Need to ask about using distribution from 401k savings plan while applying SEPP 72(t) rule with Amortization method, as we are asked to complete Vanguard "Installment payment request" form. As Vanguard agents insist on using life expectancy (single or joint) ONLY to avoid 10% penalty and asking me to file IRS form 1099R (box 1 will be checked not 2) and in addition Form 5329 (to report retirement income) on my tax filing if I were to avoid 10% penalty? However, the IRS table for single expectancy they are using generates lower yearly payment cause they are not using the applicable federal interest rate? What are they missing and how can we make sure I elect correct method to setup correct withdrawal/distribution once to avoid the 10% penalty as per SEPP 72(t) rule from my 401K account? The three options form provide are 1) fixed amount, 2) declining balance (with number of payments years) and 3) life expectancy (which I have been forced to pick). My hunch is that they are calculating the SEPP amortization method wrong (and using Minimum distribution Method instead) while not considering the interest rate factor besides single life expectancy? Please advise
You are using the wrong interest rate. You are only allowed to use the highest of the rates for the 2 months preceding the month of your first distribution. If you are starting in October, 2019, then you must use the higher of August or Sept 2019, but not July 2019. Try to recalculate.
By the way, we usually suggest that you consider starting with the amount that you want/need for your ANNUAL DISTRIBUTION AMOUNT. Then use the "REVERSE CALCULATOR" to determine the MINIMUM AMOUNT that you will need to set aside for the SEPP. Then that might allow you to keep some of your retirement account in case you need to start another SEPP in the future, or to take some emergency distribution that would be subject to the 10% penalty. Also, you should consider your 2019 tax situation to decide if you want to take 25% (3/12) of the ANNUAL DISTRIBUTION in 2019, or take a full 12 months worth of the ANNUAL DISTRIBUTION in 2019. If your 2019 tax bracket is 12%, you might consider taking the full amount, and thereby using the excess for future needs, and avoiding the 10% in the future if you might need extra money.
Thanks I recalculated with August rate of 2.24% coming out to be $36,073.36. I already have allocated separate IRA and Roth IRA (post tax) for rainy days. Yes I will be 12% tax bracket hence full amount is what I am looking for, can you also comment on the Vanguard form selection of single life expectancy they are getting lower amount close to $24000? Do you have formula how to calculate the amortization method with interest rate?
I think that the Vanguard form may be designed for RMD (Required Minimum Distributions) at 70 1/2. If so, then they allow you to override the normal life expectancy calculation with a "fixed amount", which is what you are REQUIRED to use with a SEPP. Of course, if you want to take just 3/12 of the ANNUAL AMOUNT for 2019, then you will have to talk to Vanguard about how to be able to do that.
You are correct, most tax practitioners, including CPAs, know little or nothing about SEPP 72-T requirements, nor about NUA provisions of the tax code. It is worthwhile to take the time to find one who is experienced in this area.
Syed -- We haven't heard from you in 2 months since your Sept 17 meeting with a CPA. Please bring us up to date.
I have followed up on the advise to have "fixed amount" after calculating it with amortization method (Nov. 2019 AFR rate of 2.13%) , start date of SEPP Jan 20, 2020 to last another 10 years or so? Vanguard wants you to complete the " "Installment payment Request" form and it is pretty straight forward to complete.
I spoke to several CPA's but no adequate answer in regards to 72(t) rule all gave the same answer to file 1099R + form 5329 (as mentioned above) and ask me to revert back during filing times, so in a nutshell it boils down to my filing time next year in 2020 or 2021 (since I started distribution in 2020 fiscal year). I know my income bracket moving forward (plus needs) so I feel comfortable starting SEPP plan now. Thanks for all the support here.......appreciate the candor....
If you start the payments 01/20/2020, you have chosen the wrong 120% interest rate.
You would have to use the just published January 2020 rate (on the IRS website) of 2.03%, the December 2019 rate of $2.03%, or the November rate of 1.91%. 2.13% isn't an option - if you use it, you have busted your plan as soon as you receive your first payment!
Man excellent catch just fixed the amortization calculated yearly distribution amount in time to reflect Dec 2019 AFR rate of 2.03%......(or would have surely busted my SEPP 72t plan)
I will duly revert back to the group in years time to share the taxation (1099) based information apparently not many CPAs out there who knows exactly as to which box on 1099 should be reflected (vanguard will also not confirm or deny so we will have to wait till next year filing to have more accurate information on filing taxes for distribution).....just to reiterate Vanguard form to fill out for 401k distribution is "Installment payment form" and need at least 30 days lead time before payment starts....
Worst case, Vanguard will issue you a 1099R marked with code "1" - ('Early distribution, no known exception applies'). If they do this, all you have to do is file form 5329 with your tax return. Enter exception code "2" on line 2 (Exceptions to the Additional Tax on Early Distributions) -- code '2' denotes distributions made as part of a series of substantially equal periodic payments (made at least annually) based upon life expectancy , and you should be good. Just keep copies of all of your calculations for the IRS in case there is a future issue.
I do not know of any broker or mutual fund who will use code "2" any more. They do not want to assume the responsibility, because they have no way of verifying your age, or if you have other SEPP 72-T plans at other brokers which could affect the calculations. As stated, the 5329 form is a simple form to report that you are filing for exception to the 10% penalty because the distribution was under a SEPP 72-T plan.
