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Updated guidance from IRS for Substantially Equal Periodic Payments (supersedes Rev. Rul. 2002-62)


Tracy
Posts: 29
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Topic starter
(@tracy)
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Notice 2022-06 updates the life expectancy and mortality tables used to determine substantially equal periodic payments under the methods set forth in Rev. Rul. 2002-62 and provides a 5 percent floor on the maximum interest rates that may be used to calculate annuity payments under the fixed amortization and annuitization methods.  This notice also modifies the guidance in Notice 2004-15 to apply these changes for purposes of section 72(q).

It will appear in IRB: 2022-5, dated January 31, 2022.

16 Replies
dlzallestaxes@msn.com
Posts: 176
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 3 years ago

I am waiting for a clarification of pages 7, 8, & 9.

 

In the wording of your posting, I don't understand how you can have a 5% floor "on the maximum" interest rate.

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grege
Posts: 5
(@grege)
Trusted Member
Joined: 4 months ago

Wow, thanks Tracy for posting this!

(c) Interest rates. The interest rate that may be used to apply the fixed
amortization method or the fixed annuitization method is any interest rate that is not
more than the greater of (i) 5% or (ii) 120% of the federal mid-term rate (determined in
accordance with section 1274(d) for either of the two months immediately preceding the
month in which the distribution begins).

Assuming I'm understanding correctly, this could have big implications if we're now allowed to establish a SEPP using an interest rate "that is not more than the greater of (i) 5% or (ii) 120% of the federal mid-term rate..." since the federal mid-term rate has been so low in recent years.

I look forward to the comments of those here with much more knowledge than me (i.e. everyone). 😊 

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

Illustrious Member
Posts: 176

Before everyone misunderstands this IRS Notice, I was able to get clarification. This "allows" NEW SEPP 72-T plans to use this in 2022, and "mandates" its use for NEW plans starting in 2023. This IRS Notice does not apply to plans that were in existence as of 12/31/2021.

Another aspect of this IRS Notice is that SEPP 72-T plans that start in 2023 "must" use the 12/31/2022 balance or any balance between that date and the balance on the date of the first distribution in 2023. This means that you will no longer be allowed to use any "reasonable" balance as of any date before that date, i.e. no longer up to 6 months prior to the first distribution, which we we able to use previously. Therefore, when the first distribution is before 6/30/2023, you will have a shorter period of available balances. On the other hand, when the first distribution is after 7/1/2023,  even in Nov or Dec, you can use any balance in the entire calendar year of 2023 up to that date. For SEPP 72-T plans starting in 2022, you have the option of using either any balance in the last 6 months before the first distribution, or any balance during the entire year of 2022, even if the first distribution is after 7/1/2022.

I know that this is crazy, but who said that the IRS is always logical !!!!!

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NHP920
(@nhp920)
Joined: 8 months ago

Estimable Member
Posts: 15

@grege This looks huge to me - it means a ~64% increase in the distribution I can take out. Hope there's not something I'm missing.

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twilliam
Posts: 21
(@twilliam)
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Joined: 2 years ago

Tracy and dlzallestaxes, thank you so very much for seeing this through!! I've been anxiously awaiting this guidance to see how it would relate to pre-established SEPP plans such as mine.  I'm relieved to hear that there's no requirement for me to recalculate my distributions based on the new life expectancy tables, regardless of how it would change my annual amount.  I began my plan in 2019 and I prefer to leave well enough alone. 

- T

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dlzallestaxes@msn.com
Posts: 176
(@dlzallestaxesmsn-com)
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Joined: 3 years ago

The new 2022 IRS Tables are mandatory only for NEW SEPP 72-T plans, and are not applicable to existing plans. On the other hand, for regular IRA distributions for taxpayers who were 72 in 2021 or earlier years, they have the option of either continuing under the 2021 tables, or changing to the 2022 tables, which would reduce the amount of the annual distributions.

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Gryphon
Posts: 3
(@gryphon)
Eminent Member
Joined: 4 months ago

The way I read section 4, any existing SEPP plan using the RMD method can switch to the new tables but existing plans using the amortization or annuitization methods cannot.

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

Illustrious Member
Posts: 176

That is correct. The new 2022 Tables have a higher divisor, which means you get a lower Annual Distribution if the balance hasn't changed. Most balances probably increased during 2021, so the Distribution might end up with the same amount under the RMD method. Anyone using the RMD method has to make their own decision.

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grege
(@grege)
Joined: 4 months ago

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Posts: 5

Any thoughts regarding the new 5% interest rate? Are new 2022+ SEPPs allowed to use a 5% (or 4%, or 3%, or 2%, etc.) interest rate instead of the currently lower "120% of the federal mid-term rate"?

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

Illustrious Member
Posts: 176

@grege -- I went back to your initial posting, and I see that you did say "if we're now allowed to establish a SEPP". YES. The key word is "establish" a SEPP in 2022.

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

Illustrious Member
Posts: 176

Further, in some situations, such as SEPP plans set up in late 2021, it might be an opportunity to bust those plans at lower interest rates, pay the 10% penalty on a limited number/amount of distributions, and start a new SEPP 72-T in 2022 at the significantly higher interest rate. Each taxpayer will have to do their own analysis to compare the benefits of a new SEPP 72-T with the cost of the 10% retroactive penalty on the cumulative SEPP Distributions.

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Tracy
Posts: 29
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What is probably clear to long-time readers is the new 5% maximum interest rate is the figure you plug into the calculator to determine your annual distribution amount*. If you use 5% in the calculator, the effective withdrawal rate will be something greater than 5%, likely over 6%. This may be ok for those invested in mostly stocks and planning on a short 72t plan (5 years), but could be damaging to a retirement account that does not grow quickly enough to make up the difference from the larger distributions.

While the 120% AFR has been very low lately, it's the safest interest rate to use. It usually has an effective rate of 3-4%, which is what the retirement experts have historically suggested for withdrawal rates. Remember, the IRS didn't always protect SEPP Plan participants from themselves (see What is an AFR and how do I pick one? for the history of the 120% AFR). Prior to 2002, many early retirees ran out of money in their retirement accounts before their SEPP Plans ended. 

*The interest rate is used only for the amortization or annuitization methods (interest rate is not used at all in the minimum distribution method).

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

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Posts: 176

@tracy This is true, but I have always believed that SEPP 72-T plans are usually used, and should probably only be used, as a means to supplement current cash flow with additional funds that would otherwise be "tied up" in Retirement Plans, while the taxpayer and family are struggling financially. This is often because of being unemployed over a projected long period because of disability, illness, involuntary termination, or a voluntary retirement because of work fatigue until then. I would not use a SEPP 72-T as a "retirement planning tool".

I have a client who was terminated in his early 50's. He had gotten divorced, and his kids had 529 plans and scholarships, so their educations were "paid for". He wasn't sure if he would want to go back to work, or if so, when. We looked at his Taxable 401-K, IRA, and ROTH IRA, and decided that he preferred the flexibility of mixing distributions and sales on non-retirement assets where gains were tax free if we kept his Taxable Income under  $ 40,000 until he was 59 1/2. We kept the 10% penalty at a level that it was offset by the Education Tax Credits, rather than having to be locked into a SEPP 72-T plan for many years until he was 59 1/2. If he went back to work, or if the stock market crashed, then the SEPP 72-T distributions would possibly end up being taxed at 22% or more.

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Tracy
Posts: 29
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Topic starter
(@tracy)
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Joined: 3 years ago

Another interesting tidbit I found is that the new Notice 2022-6 mentions annual recalculations only for the Minimum Distribution calculation method; it is silent on the matter for Amortization and Annuitization methods (in fact the guidance states that annual distribution amounts in these cases will not change). Recalculations are not typical for those using the Amortization and Annuitization methods, so this should not concern many of us, but I wonder if the past PLRs (and past advice in this website's Q&A) can no longer be relied on.

Also, I updated all pages in this website to account for the new guidance. Please let me know if anyone sees any discrepancies in the updated pages using the Contact Form.

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dlzallestaxes@msn.com
Posts: 176
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 3 years ago

We are good. The new regs do not affect prior plans, except for RMD plans.

The amortization or annuitization methods are affected only for new plans starting in 2022 (elected) and 2023 (mandatory).

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William
Posts: 11
(@wjsteckerwispertel-net)
Estimable Member
Joined: 3 years ago

I think readers potentially misinterpret how to treat the progression of IRS pronouncements on SEPPs:  Notice 89-25; Rev. Rule 2002-62 and now Notice 2022-6.  These pronouncements do not replace prior pronouncements in their entirety; e.g.  Rev. Rule 2002-62 might have 20 specific points it makes; Notice 2022-62 might also have 20 points it makes; 10 of which directly supercede or replace 10 points in Rev, Rule 2002-62.  So what we are left with is a mixed body of authority:  the 10 remaining points in Revenue Ruling 2002-62 that were not mentioned in 2020-6 plus the 10 replacements in 2020-6 plus 10 new points heretofore not previously discussed. 

 

I know this is a bit convoluted but  think of it this way:  The IRC (that's the 10,000 pages enacted by Congress) is now called The Internal Revenue Code of 1986 As Amended.  So after an individual tax act (of which there have been probably 20 to 30 since 1986) is passed and signed, a sub-committee sits down an actually red-lines the IRC crossing out the old stuff and adding in the stuff and the IRC is republished "as amended".  This makes life for tax accountants semi-livable; we all know that we can pick up a current IRC and it has been updated to reflect current law; otherwise we would be in the tracing business of going back all the way to 1986 and finding of the originating code section and then reading through all of the indicies of the intervening tax acts to see if there were any updates.

 

Well, the IRS is not so nice.  The IRS has a variety of pronouncement devices: regulations, rulings, notices, procedures, publications, etc.  Virtually none of these devices are "as amended".  Instead, each issuance stands on its own two feet.  As a result, as it relates to SEPPs we "in fact" are in the tracing business to solve tax questions in 2022.  Fortunately, we really only have five pieces of published authority:  IRC §72(t)(2)(A)(iv),  Notice 89-25, Rev. Rule 2002-62, Notice 2020-6 and case law to work on the logic of SEPPs. I am excluding published tables here as a table does not influence one's decision-making on a SEPP plan per se; rather we just need to go use the right table to extract a reference value of some kind.

Notice that we are not reading "IRS Notice 89-25 As Amended" as an updated compilation of SEPP regulations; we instead are forced to regularly read all four authorities  to ferret out the correct answer.

 

In summary, and this happens all of the time, we need to read all of the authority on a SEPP question making note of what is written as well as what is not written in order to get the right answer.  Example:  both RR 2002-62 and Notice 20202-6 contain .02(e) Changes To Account Balances with very similar but not identical language.  What is not written about is Trustee-To-Trustee transfers which are separately authorized  in Revenue Ruling 78-406 (just 44 years ago).  So are TTTT's permitted --- absolutely;  in general a current IRS pronouncement that negates, hinders or penalizes a transaction permitted by another code section or prior pronouncement is voided and/or corrected.

Finally, let's focus on annually recalculated SEPP plans.  Does Rev. Rule 2002-62 or Notice 2022-6 prevent annually recalculated SEPP plans?  Absolutely not!  Both documents are silent on the subject but instead provide very accurate descriptions on how the "Fixed Amortization Method" is to be properly calculated. So where is the authority for an annual recalculation?  It actually comes in two parts:  (1) go back and read Notice 89-25 and find the word "fixed".  You can't because its not there.  Notice 89-25 did define amortization as a "good" method and stopped;  it did not make mention of several, fixed and variable, amortization methodologies available & existing then and now.  (2) A bit more arcane, carefully read the about the minimum method which we take at face value as: account balance divided by life expectancy (as updated year-to-year).  Looks like recalculation to me.   Also, re-read Notice 89-25  --- the language used is "using a method that would be acceptable for purposes of calculating the minimum distribution required under §401(a)(9) --- this is very different (and broader) language than the RMD language in RR 2002-62 and Notice 2022-6.  So by definition the original language stands; it did not get hurt or diminished later.  So how about we add an interest rate to the minimum method and annually recalculate?  Giver me a formula an we are set to go.  How do you think the 15 or so PLRs on annual recalculation got approved?

 

Just my 2 cents which obviously turned into $20.00

 

William J. Stecker, CPA

The Marble Group, Ltd.

(312) 361-0221

 

 

 

 

 

 

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