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- Date of Birth: 05-24-66
- Age: 54
- Single/Married Married
- Annual cash needed year 1 (after taxes):$29,000-$30,000
- Annual cash needed later years (after taxes): same $29,000-$30,000
- 72t Method:Constant Distribution Amount$32,284.00
- 72t Distribution Start Date: 2-15-2020
- Life Table Used: Single
- Stub Year (Y/N):
- Annual Recalc (Y/N): N
- AFR Rate: 3%
- 72t Account Balance(s):
- Describe other assets if applicable (taxable, Roth, other income, etc.) and how much is in each account.
- Honestly this is new to me and I am very excited. We retired at age 51 and have lived off of our savings and small rental income. We had originally planned to sell our rental home to continue our Fulltime Rving Retirement. Now I want to start this to fund the next few years before 59 1/2 and Social Security. No debt $85,000 emergency fund additional $200,000 in another 401K. Home equity is about $300,000 but feel that is a better investment as a rental (income) and not having to pay capitol gains with the sale.
Congratulations !!! BTW, be careful about converting your home into a rental property. If you have a Capital Gain, it will be TAXABLE and you cannot use the $ 250K per person/$ 500K per couple exclusion if you have not occupied it as your PRIMARY RESIDENCE in at least 24 months out of the 60 months before you sell it. Also, you will be taxed on DEPRECIATION RECAPTURE at 25% on the depreciation that you deducted (or should have deducted) while it was s rental property.
You are starting at a good time because SEPP 72-T plans must be for the longer of age 59 1/2 or 5 years. (I think that you have a typo and meant that you WILL BE starting the plan 2-15-2021, not 2020.) So your plan will be required to stay in place until 8/15/2026 if you do start it with a 1st distribution 2/15/2021, which might be tight for implementation. You did not mention how much you are planning to include in your SEPP 72-T "Universe", and therefore if there will be enough to set aside for an "emergency fund", unless you need your entire IRA for your SEPP 72-T plan.
Based upon your figures -- $ 32,284 gross annual distribution and $ 29-30,000 net after taxes, you are providing only $ 2,284-$ 3,284 per year for federal and possibly state income taxes, which seems very low.
I suggest that you review your tax situation with a qualified tax advisor. It might be worthwhile for you also to consider ROTH CONVERSIONS also, depending upon the extent of your IRA account, and your limited taxable income. Further, if you and your wife are in good health when you reach 62, we usually recommend deferring SS benefits until age 70, which will result in 70% more SS benefits starting at that age for both you and your wife for the rest f your lives, regardless which one survives. Between 59 1/2 and 72, depending upon your cash needs, you should consider taking IRA distributions up to the limit of the 12% tax bracket, which is $ 105,000 of GROSS INCOME, which is $ 80,000 of taxable income after the $ 24,000 Standard Deduction.
You might want to wait until March or April, and do more projections and analysis. You can take a full annual distribution for 2021 regardless when you take your 1st distribution.
Thank you for the quick response. Not sure what you mean by this?
"You did not mention how much you are planning to include in your SEPP 72-T "Universe", and therefore if there will be enough to set aside for an "emergency fund", unless you need your entire IRA for your SEPP 72-T plan.
We will need about 29-30k to continue our current lifestyle. We do have the additional 200k 401K plan. I Used the larger balance 401K in order to get the amortization amount we wanted. I have seen comments about moving funds to a IRA just to draw on. Could we move $150,00 and then do our calculations based on just that? Kinda confusing.. again sorry this is all so new....
As far as the home to rental we hope to just use the income to fund some of our adventures and leave the property to our kids...in our family trust.......or move back for the required 2 years before selling...... We reside in Texas as our domicile so no State Income Tax. We need to keep our income low to continue to qualify for reduced Health Care.
You didn't answer s to the amount of your IRA. For simplicity sake, let's assume that you have $ 2 million in an IRA. Use the "REVERSE MAXIMUM CALCULATOR" on this website (or whatever it is called). This will calculate what the MAXIMUM amount of your IRA that is needed to provide the RMD for the $ 32K GROSS INCOME you need. Let's say that is $ 1.5 million. The that is your "IRA UNIVERSE", and we would then suggest moving the remaining $ t500K into a SEPARATE IRA account for future use, either for a 2nd SEPP 72-T account, or for an emergency.
Without knowing the size of your IRA, we cannot help you determine how much you will need in your IRA for the SEPP 72-T plan, and whther it is enough to provide for the $ 32K that you need. SEPP 72-T distributions are a CALCULATION, rather than just an amount that you pick out of the air to be the amount that you can take from the SEPP 72-T IRA account. This is an IRS controlled figure, not a taxpayer controlled one.
I understand your wanting to minimize your income to reduce your health care cost, but you should see if you are sacrificing the potential for TAX-FREE income and growth in a ROTH IRA by doing a ROTH CONVERSION which will benefit you and your children more in the future. You might not be seeing the forest for the trees. This type of analysis is done by an experienced professional tax and/or financial advisor, which is different from a tax return prepare or stock broker.
Sorry the IRA universe I used was 688,000. The balance in one account. That is what gave the figures above. I do need to do more research as this was a very new option for us. Thank you for your help. Going to spend some time researching the site and reading more.
RP:
Congratulations on your early retirement! I was reading your post and in your intro you show that you're using an AFR of 3%. The fed midterm rate for Jan 2021 is .52%. Are you basing your annual withdraw amount on the current rate or on the 3% rate? I'm not sure that you'll be able to withdraw $32,000 based on the current midterm rates.
- T
I agree with T William. I think that you misunderstood what the "AFR Rate" means. It is 120% of any of the current and last 2 announced rates. I think that you might have just picked a rate that you hoped to be able to generate as far as your income. If not, then where did you get the AFR rate of 3% from ? (P.S. Look in the Glossary on this website for an explanation.)
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.
Accordingly, I think that you will probably need about $ 1,000,000 in your SEPP 72-T plan in order to take $ 32,000/year before taxes.
Thank you, I see where I need to change the rate. I have done more research on the site and appreciate all of your feedback.... still doing more research and going to contact a financial advisor regarding the Roth and my Sepp Plans.
I have suggested to the moderator of this website that it would be helpful if each of the items in the template was linked to the applicable glossary or other aid to help people fill in the information.
