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Thank you for all of the great content here on 72tnet.com! It has been much appreciated as I've prepared to begin a SEPP.
I could use an extra set of eyes (or two) on the following SEPP information/calculation to ensure I'm not making rookie mistakes.
- Date of Birth: 12/03/68
- Age: 53 (using highest attained age of "54" in 2022 Single Life Table.)
- Single/Married: Married (no children)
- Annual cash needed year 1 (after taxes): $78k
- Annual cash needed later years (after taxes): $78k
- How are you planning on paying taxes? (withholding or quarterly estimates): withholding
- 72t Method: amortization
- 72t Distribution Start Date: soon (in the next week or so)
- Life Table Used: Single (Life Expectancy: 32.5 using "54" in 2022 Single Life Table)
- Stub Year (Y/N): N
- Annual Recalc (Y/N): N
- AFR Rate: 1.52% (the December Mid-term 120% AFR rate)
- 72t Account Balance(s) with account type (traditional IRA, Roth, SEP-IRA, SIMPLE-IRA, 401k, 403b, etc.): Traditional IRA: $1,492,115.26 (as of 12/31/2021)
- Describe other assets if applicable (taxable, Roth, other income, etc.) and how much is in each account:
- Cash: $140k
- Roth IRA contributions: $130k
- HSA: $100k
- total investments (not all listed here): ~$3m (mostly tax deferred)
The 72tnet.com SEPP Distribution Calculator produces a "Constant SEPP Distribution Amount - Amortization Method" of $58,522.30
LibreOffice Calc PMT(1.520%,32.5,1492115.26) yields $58,522.31.
The plan is to live on my SEPP and, in coming months, add a SEPP for my wife using her 403b, after we roll it over to a traditional IRA. Her SEPP will yield about $20k/yr. We'll use cash and, if necessary, our penalty-free Roth IRA contributions to cover remaining expenses and the HSA for qualified medical expenses.
Does my SEPP information/calculation look accurate to you?
Thank you very much for your time and consideration!
grege
You are correct in keeping the HSA for Medical Expenses. If you are fortunate enough to not need it in the next 10+ years, it can always be cashed in, and taxed like a Traditional IRA. Since you don't have any children, the ROTH IRA can be used in years that you need additional cash (like for taxes) without generating taxable income. It is a good idea to roll over your wife's 403-B into an IRA so that there would not be any withholding required on distributions, which would be required in distributions from a 403-B or 401-K.
You didn't indicate if you, and your wife, are both planning to retire, but I assume so. You didn't indicate the extent of Taxable Investment Income (Interest, Dividends, Capital Gains, etc.), and your expected 2022 Taxable Income and Tax Bracket. The MFJ 12% Tax Bracket goes up to $ 83,500 in 2022. When you add the Standard Deduction (< age 65) of $ 25,900, the total of $ 109,400 becomes the target for "Tax Planning". You indicate your SEPP will be $ 58,523 + $ 20,000 for your wife. That means that if you don't have any other taxable income, tax and financial planning professionals would recommend considering doing ROTH CONVERSIONS of $ 31,000 per year as well, at a federal tax cost of only $ 3,720. (Your state might also tax it, but not in PA.)
I do not understand your note that you have total investments (not all listed here): ~$3m (MOSTLY TAX-DEFERRED). You indicated about $ 1.5 million in your IRA. How much is in NON-RETIREMENT accounts ? How much is in your and your wife's SEP-IRA, SIMPLE-IRA, 401k, 403b ? Does your 401-K have company stock that might be eligible for the special tax provision called "NUA (Net Unrealized Appreciation)" ? If so, there could be a significant tax savings if you could wait until January 2023 to retire from that employer.
Thank you so much for your quick and thoughtful reply dlzallestaxes!
Regarding retirement, my wife retired about a year ago and I'll be retired in a couple of weeks.
Here are our additional investments:
- Roth IRA: $373k
- 401k: $56k (no company stock)
- Wife's Roth IRA: $250k
- Wife's 403b: $600k
- Wife's Traditional IRA: $75k
We should be well below $109,400 for 2022, but our Traditional IRA investments will be tied-up by the two SEPPs, with the exception perhaps of my wife's $75k Traditional IRA.
Thank you so much again!
grege
I think it would be ideal to do ROTH CONVERSIONS for your wife's IRA on a planned approach of say $ 25,000 in 2022, 2023, and 2024 (balance including growth), or $ 30,000 in 2022 and 2023, and $ 15,000 (+ growth) in 2024. Ultimately this will save you at least $ 7,500 in taxes ( $ 75,000 @ 10% difference between 12% and 22%) plus the $ 15,000 taxes in the future when the IRA would be worth $ 150,000 at age 65. or save $ 30,000 at age 77 when it would be worth $ 300,000, assuming a 6% dividend and annual growth rate). You could do these ROTH CONVERSIONS each year, either every January, or semi-annually, or quarterly, or monthly, or "time the market" when there is a big drop.
@dlzallestaxesmsn-com thank you very much for the excellent advice and detail! You are amazing and I am in your debt.
You are welcome. Often, the technical details of the SEPP 72-T process are not as important as the TAX PLANNING related to the entire Retirement Planning process. Most people do not post all of the information that may be appropriate for giving the best guidance. It is important for us to know all of the pertinent information, such as single/married/children, taxable income for the current and future years, all retirement and non-retirement accounts, and if there is a 401-K with employer stock (for an NUA approach). Most people who visit this site should be meeting with a qualified professional who understands SEPP 72-T, NUA, and all of these Retirement Planning areas. Otherwise, it is the blind leading the blind as far as it being the taxpayer doing it himself.
I met one person (now a client) who was "advised" to set up a SEPP 72-T, when all that she and her husband (both in their early 50's) needed to do was to PLAN a structure involving a combination of IRA distributions (limited to the 10% penalty), Qualified Dividends, Capital Gain Dividends, and Capital Gains from sales of stocks (both taxed at -0- in the 12% tax bracket if taxable income is < $ 110,000), purchases of ETFs (which grow in value without taxes currently), and ROTH CONVERSIONS or ROTH DISTRIBUTIONS,( depending upon the year or need), until they reached 59 1/2, and then other coordinated approaches from then until 72 (now) while delaying SS benefits until 70 to get 70% more than at age 62, or 32% more than at age 66.
