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Starting 72T in December


NHP920
Posts: 15
Topic starter
(@nhp920)
Estimable Member
Joined: 4 months ago
  • Date of Birth: 3/12/81
  • Age: 40
  • Married
  • Annual cash needed year 1 (after taxes): $25,462.81
  • Annual cash needed later years (after taxes): $25,462.81
  • How are you planning on paying taxes? (withholding or quarterly estimates): Withholding
  • 72t Method: Amortization
  • 72t Distribution Start Date: 12/15/2021
  • Life Table Used: Single
  • Stub Year (Y/N): No
  • Annual Recalc (Y/N): No
  • AFR Rate: 1.52%
  • 72t Account Balance(s) with account type (traditional IRA, Roth, SEP-IRA, SIMPLE-IRA, 401k, 403b, etc.): 807,399.04
  • Describe other assets: Cash ~100,000, other retirement accounts ~$100k

 

Just wanted to run this by the forum before I take my first distribution because I'll be on this plan for the next 2 decades. Does everything look okay?

I noticed the calculator on this site rounds the account balances down to the nearest dollar before calculating the distribution. Should I round down to the nearest dollar on the distributions as well? Or to a convenient whole number like $25,000? 

29 Replies
twilliam
Posts: 20
(@twilliam)
Reputable Member
Joined: 2 years ago

Hello NHP 920... I'm pretty sure you're okay to round down to 807,399.00 for your SEPP plan starting balance.  As for rounding the distribution, I would play it safe and take annual distributions of $24,637.00 (taking off the $.09).  Taking your calculation result and rounding to the nearest dollar, from what I've learned, is a safe option.  I definitely would not round up to $25,000.    

I'm not nearly as knowledgeable as others on this forum, so please wait for others to review your information and give their feedback.

Best of luck with your plan!!

- T 

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1 Reply
NHP920
(@nhp920)
Joined: 4 months ago

Estimable Member
Posts: 15

@twilliam Thanks - I am getting $25,463 as the amount of the distribution

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dlzallestaxes@msn.com
Posts: 158
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 3 years ago

With the big sell-off on Friday, and possibly on Monday and Tuesday, just an alert that you do not have to use and end of month balance. I would printout your balances as of 11/24/2021, just in case that is the highest balance for the rest of 2021.

Also, you cannot combine 401-K and IRA balances in the same plan. They must be two separate plans.

NHP and you had different calculations, about $ 825 different. Also, you said that you wanted your figure to be after tax withholding. Did you project your 2022 and future taxable income and federal and state income taxes ? Since you are married, I will assume that your JOINT GROSS INCOME will be less than $ 105,000, which would mean that your TAXABLE INCOME will be less than $ 80,000, which is the top of the 12% tax bracket (and any Qualified Dividends and Long-Term Capital Gains would be taxed at -0-). If these distributions are taxable in your state, then you would need to shoot for $ 30,000 GROSS distribution, which would net at about $ 25,000 after $ 4,500 in tax withholdings. If the most that your accounts can produce, then you will have to pay the taxes from your non-SEPP 72-T funds.

 

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1 Reply
NHP920
(@nhp920)
Joined: 4 months ago

Estimable Member
Posts: 15

@dlzallestaxesmsn-com Thank you for the tips. I intended to write that I need the $25,463 before taxes (I can pay the tax out of that amount).

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Tracy
Posts: 26
Admin
(@tracy)
Illustrious Member
Joined: 3 years ago

Hi NHP920, the difference in yours and twilliams' distribution amounts is the life expectancy factor you used. You used the 2021 factor and twilliam used the 2022 factor.  I was able to reproduce both of your figures, and as far as we know today, you can still use the 2021 factor in December 2021. If you choose to wait until January, you'll have to use the 2022 factor, which will drop your distribution down about $826 per year. 

For purposes of the forum (you may have already thought of these), there are a few reasons to consider waiting until January:

  • It will be easier to know when you've completed the SEPP at 59 1/2, because you will be on a full-year basis. You won't have to worry about "do I take the last distribution in January of the final year or can I skip it?" kind of question.
  • The most dangerous time of the year to take withdrawals is the last half of December. If for example, the market drops on December 15 and you wait until the last few days of December to take your withdrawal, your brokerage may finalize the withdrawal in January. You'll have to do this for 20 years, as you mentioned.
  • January's AFR may increase, as has been the trend the past few months, which will allow you to withdraw a larger amount, maybe more than you would lose by using the 2022 life expectancy table. The IRS usually publishes the next month's rate on the 16th-18th of the month. This publication date is pushing it for your timeline but you could make the Dec/Jan decision depending on the new rates. I try to get the new rates updated on this site as soon as I see them but you can go directly to https://www.irs.gov/applicable-federal-rates to learn January's rate. You can set up a subscription on the IRS site so you get the notification via email as soon as it's published.

Hope that is helpful.

Tracy

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1 Reply
NHP920
(@nhp920)
Joined: 4 months ago

Estimable Member
Posts: 15

@tracy Very helpful, thank you! I figure taking the extra payment this year as well as the life expectancy table change will offset the opportunity cost of any further rate increases that may come next year. I will be sure to take it in the first half of December. 

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dlzallestaxes@msn.com
Posts: 158
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 3 years ago

One important consideration is you taxable income for 2021 when you add either 1 month or 12 months of income to your other 2021 taxable income.

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twilliam
Posts: 20
(@twilliam)
Reputable Member
Joined: 2 years ago

NHP920,

Tracy was spot on.  When I looked at your numbers, I was using the new life expectancy tables for 2022.  Sorry for the confusion... So, rounding up to $25,463.00 from $25,462.81 will be fine.  In my opinion, keeping the annual distribution amount at the nearest whole dollar is your safest move.  For my SEPP plan I choose to take one annual distribution, ILO multiple (semi-annual, quarterly or monthly) payments.  I find that to be much easier to hit my exact amount of withdrawal each year, instead of several withdrawals combined.  I like to keep things as clean as possible to remove any chance of error.

Best of luck to you with your plan!

 

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dlzallestaxes@msn.com
Posts: 158
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 3 years ago

The main issue to be careful to be aware of with annual distributions is that the paln does not end at the 5th distribution. It does not end until 60 months after the first distribution. This is a common misunderstanding by typical taxpayers, and is the most frequent topic on this website. 

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livingthedream
Posts: 16
(@livingthedream)
Estimable Member
Joined: 9 months ago

My one suggestion would be to consider breaking up the SEPP given that you want to take it for so long. You have a lot in cash it looks like for emergencies so this may not be necessary, but depending upon your situation and plans for the future it may still be something to consider. Who knows, you might want to purchase property or do something for children you may have or help out a family member. It just gives you more flexibility.

So if you set up the SEPP now for only half this amount and took the other half as a non-SEPP early distribution and paid the 10% penalty the penalty tax on the non-SEPP portion you withdraw that tax would be about $1200 on $12000 withdrawal and you are only tying up $400k for 20 years rather than $800k. That 800K should grow substantially in that time and you may find you have other uses for it. You could do that for a few years and then when you feel comfortable that you truly won't want to touch the account for anything else make a second SEPP for the remainder. The account would have grown (hopefully) and the second SEPP could be possibly for a larger amount or you now can put some more into your other retirement accounts. I'm doing that even though I am 52 and don't have as long to go with this plan. I know that a lot of things could come up between now and 59 1/2. Just something else to consider if you haven't already.

Congrats!

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David8818
Posts: 11
(@david8818)
Estimable Member
Joined: 4 months ago

Might be too late, but doesn't the OP need to use the November 120% rate of 1.3% for a December withdrawal?

1.52% is the December rate. I thought the rule was the previous two months. 

You may use any interest rate that is not more than 120% of the federal mid-term rate published in IRS revenue rulings for either of the two months immediately before distributions begin.

If the OP starts in Jan. 2022 1.52% would be correct.

I hope I am incorrect.

 

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6 Replies
NHP920
(@nhp920)
Joined: 4 months ago

Estimable Member
Posts: 15

@david8818 Thanks for noting this - on the IRS website I read it the same as you. But on this site, it says "either the current month or the preceding two months", and it doesn't make sense to me that the current month's rate would be excluded. I'm still within the 60-day rollover window so I could re-deposit the money and then withdraw, but then I'd lose the extra 2021 distribution.

Can anyone clarify whether using current month AFR is allowed?

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dlzallestaxes@msn.com
(@dlzallestaxesmsn-com)
Joined: 3 years ago

Illustrious Member
Posts: 158

If you click on the link above "APPLICABLE FEDERAL RATE TABLE", this is the following:

This table contains the maximum Applicable Federal Rates (also known as the 120% Federal Mid-Term Rates) allowed to be used in calculating SEPP distributions.

What is an AFR and how do I pick one?

You can use EITHER the current month’s rate OR one of the prior 2 months rates. For example, if you’re calculating a distribution which will start in June, you can use April, May or June rates.

Verify the rate you plan to use at the IRS website: https://apps.irs.gov/app/picklist/list/federalRates.html.

Useage Note: these are the 120% rates so you use them as-is.

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dlzallestaxes@msn.com
(@dlzallestaxesmsn-com)
Joined: 3 years ago

Illustrious Member
Posts: 158

You can start your plan today under the 2021 IRS TABLE and take the distribution today for either the entire 2021 amount (100%), or 50% (6 months), 25% (3 months), 8.33% (1 month) and then RECALCULATE your ANNUAL AMOUNT for 2022.

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NHP920
(@nhp920)
Joined: 4 months ago

Estimable Member
Posts: 15

@dlzallestaxesmsn-com But if I took the disbursement in December, can I use the December rate? Or does it have to be November or October? This website says I can use the same month, but the wording of the IRS doesn't seem to confirm that.

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dlzallestaxes@msn.com
(@dlzallestaxesmsn-com)
Joined: 3 years ago

Illustrious Member
Posts: 158

You are correct. You cannot use the rate for the current month. It must be the interest rate for either of the 2 PRIOR months. I don't know how you can take your first distribution in Dec unless you are in a time zone where it is not yet 2022. However, if you can, then you can do it with the Nov or Oct interest rates to get an extra 1 to 12 months' of distributions, so long as it doesn't put you in a higher tax bracket for 2021. In January 2022 the new divisor can or should be used. It is unclear if this change for plans existing at 12/31/2021 must change the divisor, or have the option to change it or not. The new 2022 divisors are higher, and therefore the annual distributions will be lower.

I will ask the website administrator to correct the wording in the link at the top.

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NHP920
(@nhp920)
Joined: 4 months ago

Estimable Member
Posts: 15

@dlzallestaxesmsn-com On the IRS website, it doesn't say anything about the current month, it says:

3. How are interest rates determined?

You may use any interest rate that is not more than 120% of the federal mid-term rate published in IRS revenue rulings for either of the two months immediately before distributions begin.

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dlzallestaxes@msn.com
Posts: 158
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 3 years ago

If the initial DISTRIBUTION is in January 2022, then you can use EITHER the Nov or Dec 2021 rates.

 

But, ALERT -- you must use the NEW IRS LIFE EXPECTANCY TABLES (see link at the top of the home page above) for all new SEPP 72t plans starting in 2022 or later..

 

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Tracy
Posts: 26
Admin
(@tracy)
Illustrious Member
Joined: 3 years ago

Great catch David8818. I updated the wording on the Applicable Federal Rate Table and What Is an AFR pages to reflect the exact wording on the IRS website. 

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David8818
Posts: 11
(@david8818)
Estimable Member
Joined: 4 months ago

No Problem, glad I could help.  My question is how does the OP correct his December distribution for this year and the be able to take a distribution next year? 

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dlzallestaxes@msn.com
Posts: 158
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 3 years ago

I am not sure what you mean by "OP". But, in answering you question, if you want to LOWER your ANNUAL amount, then you are allowed to use the new IRS life expectancy tables. It is not mandatory that you do this recalculation.

If you took a 1st distribution in 2021, or any prior year, then on 1/1/2022 you can recalculate your ANNUAL DISTRIBUTION for 2022 and future years. The approach is a little tricky. You still use the original interest rate, and you still use the original IRA balance that you used for that 1st distribution. You then go to the NEW 2022 IRS tables, and find the new divisor for the age that you were when you took the 1st SEPP 72t distribution. You then calculate what the annual distribution would have been if the 2022 tables were in existence in the year that you started. The difference for SEPP plans is about 1.8 year increase in the divisor, which will allow you to DECREASE the ANNUAL amount to some extent. If, however, you set your original SEPP plan at the maximum amount that you needed, then you would probably not want to make this change, unless your financial situation has changed, and you want to reduce your annual distribution legally.

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NHP920
Posts: 15
Topic starter
(@nhp920)
Estimable Member
Joined: 4 months ago

Yes, thanks for catching this, David. I'm a little confused how such a fundamental error in SEPP planning could be perpetuated on this site for so long. It seems like my options are now:

 

1) Take the penalty for 2021

2) Re-deposit the withdrawal as a rollover and lose the 2021 distribution

3) Add my "emergency" IRA to my SEPP universe to justify the higher withdrawal - but this would use up the backup account for only about 15% of what I could have used it for if I included it in the first place. 

Or how about: 1a) Do nothing for the 2021 deposit. Take the same withdrawal amount in 2022 as a new SEPP plan but supported by a correct 2022 balance and rate. I'm thinking there's less chance of raising eyebrows if it's the same amount withdrawn in 2021 and 2022? But if audited, pay the 2021 penalty (i.e., as in option 1 above.)

 

Open to hearing other ideas or suggestions.

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dlzallestaxes@msn.com
Posts: 158
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 3 years ago

Since it is now 2022, I don't think that you can do either # 1 or # 2 for the following reasons:

 

#1 -- I think that the penalty for terminating the plan would be in 2022 when the plan was terminated.

#2 -- I don't think that you can redeposit/roll over the amount already distributed.

If you terminated/busted your plan in January, then you can start a new SEPP in January, and use the Nov or Dec interest rates (or wait until Feb if you want to use the slightly higher Jan interest rate). This might work in your favor if your IRA balance was higher 12/31/2021 than when you started your plan.

 

There have been so many responses to this posting that I am not sure who is who, and if we are all still talking about a 12/15/2021 start, especially because of the postings yesterday, 12/31/2021. If the original 12/15/2021 start date, and you took the $25,462.81 in Dec 2021, then you have to weigh the $ 2,546.28 penalty in 2022, vs. the increase in annual distributions based upon the higher Dec/Jan interest rates, but using the higher 2022 divisor for a lower annual amount, as well as the tax on the difference on the annual amount. Obviously, you need a spreadsheet to analyze this, especially since it involves 19 years of payments. You might need to add some, but not all, of the amount in your "emergency" IRA to your SEPP IRA to match your "annual needs". You already have the $ 25,462.81 anyway from your Dec distribution.

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1 Reply
NHP920
(@nhp920)
Joined: 4 months ago

Estimable Member
Posts: 15

@dlzallestaxesmsn-com

For #1: I would treat it as an unqualified withdrawal in 2021 and pay the 10% penalty for 2021 - as far as anyone knows there was never even a SEPP plan attached. Why wouldn't I be able to do that?

For #2: Why couldn't I re-deposit the distribution within 60-days under the 60-day rollover rule? 

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dlzallestaxes@msn.com
Posts: 158
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 3 years ago

#1 -- I guess that you could do that. You are right that no SEPP documents are sent to the IRS, and I guess that most brokers or mutual plans don't ask for documents either. The reporting is at the taxpayer end when the tax return is filed with a 5329 excption.

#2 -- I don't know if you can do that in a SEPP. I doubt it.

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David8818
Posts: 11
(@david8818)
Estimable Member
Joined: 4 months ago

Sorry for the confusion "OP" is just Original Poster. In the case NPH920. 

 

I agree with just treating the 2021 distribution as a non SEPP and just pay the 10% penalty.

Then just make a new SEPP plan going forward from 2022. 

At least you can get both distribution. 

Not sure about the 60 day rule. 

I don't know what the chances of getting audited are if you do nothing and continue with the same amount.

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dlzallestaxes@msn.com
Posts: 158
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 3 years ago

It might be considered "tax fraud". "Ignorance of the law is not a valid defense."

 

If caught, the penalty then would be 10% of all invalid distributions from the beginning, which could be a very expensive gambit.

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NHP920
Posts: 15
Topic starter
(@nhp920)
Estimable Member
Joined: 4 months ago

Okay - I'm averse to wasting money so I ended up re-depositing the distribution under the 60-day rollover rule. Now it's like there never was a SEPP in 2021 and I can start a new one in 2022.

My account balances and the interest rates are up a little bit, so even though I'll lose the 2021 distribution, I'll be getting a little more each year going forward. It's probably better for tax and length-of-SEPP reasons to start in 2022, anyway.

Thanks David and everyone for their input.

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David8818
Posts: 11
(@david8818)
Estimable Member
Joined: 4 months ago

NHP920, Glad you have this resolved! Sorry you missed out on the 2021 distributions, but 20 years from now it won't likely matter much. Good luck and your welcome, happy to help.

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