120% Mid-Term Applicable Federal Rates Question
L1: 120% Mid-Term Applicable Federal Rates QuestionRight now, the reasonable interest rate to be used is at 2.36%. If I were to start taking SEPP next month (I’m 43years old), am I locked into that rate for that duration, even if the midterm rates go higher in the future?
I’m disappointed that the rate is so low right now — back in 2007, it was as high as 6 percent. I won’t be able to make this work unless I can draw 5 percent, and it seems like we may not see that sort of an interest rate for at least 5-10 years. What do you think?2014-03-07 14:12, By: sjwoo, IP: [18.104.22.168]
L2: 120% Mid-Term Applicable Federal Rates QuestionYes, you are locked in unlessyouadopted a recalculation plan under which you would use the current interest rate, account balance and age for each year. That said, this is risky because the IRS does not deal with many of these, you would have to make 16 different calculations with attendant chance of error, and the different annual distribution amountis likely to result in IRS questions.
In addition, plans that are started before age 50 and have so long to run are unlikely to address your current needs for that entireperiod of timeand this increases the chance of your having to bust the plan, particularly if you cannot pad the distribution amount for inflation to start with. But if you need these funds, and have no other choice at least be particularly careful in planning and executing the plan.
2014-03-07 15:19, By: Alan S, IP: [22.214.171.124]
L3: 120% Mid-Term Applicable Federal Rates QuestionThanks, Alan. SoI think what I’ll do is wait until the Treasury rates go back up to5%. I hope it’ll happen in the next five years, but who really knows. I just hope we don’t revisit the 2008 lows again, because if we do, then myhearly retirestay ament dream is gonna stay a dream a bit longer.
I’m just considering ER scenarios, and since most of my capital is in my 401(k), I was thinking of ways toextractfrom it without touching the principal. If I were to convert the 401(k) into a traditional IRA, then buy a basket of solid dividend stocks plus a few REITs and a couple ofMLPs and BDCs, I figure I might be able tolive off just the dividends.
By the way, if I end up getting something like $30K in dividends every year, and I end up pulling that much out via SEPP, would I be paying ordinary income tax on the 30K, or the qualified dividend tax, which might be zero if I’m able to earn below the 15% threshold?2014-03-07 23:20, By: sjwoo, IP: [126.96.36.199]
L4: 120% Mid-Term Applicable Federal Rates QuestionBased upon your last question, you obviously do not understand the tax system, not that many people do.
1. Everything distributed from any retirement plan is taxed at your Ordinary Income Tax Rate for that year, unless you had non-deductible IRA contributions at some time, in which case there is a prorated calculation.
2. By everything, I mean the original contributions by you, any matching contributions by your employer, all interest and dividend income, and all capital gains on any investments sold within the 401-K or IRA.
3. Based upon #2 is why I recommend that if someone has enough outside of his retirement plan(s) to balance his portfolio(s) as “age and risk appropriate”, that all or most of the investments within the retirement plan should be fixed interest, such as corporate bonds, government bonds, REITs, GNMA, FNMA, Freddie Mac, Federal Home Loan Bank, and CDs (if interest rates were high enough), and taxable bond funds (but only up to intermediate length because of the risk of long term bonds). Even preferred stocks, if necessary, if you get those paying 5% or more, even though many/most of them now are structured to yield Qualified Dividends.
4. Only Qualified Dividends and Long-Term Capital Gains in non-retirement accounts are eligible for the preferential 15% (or 20% for high income taxpayers) rate. That is why I recommend that stocks be the investments outside of the retirement accounts.
However, you have to consider what your cash flow needs are from the SEPP, or any retirement account. If the income generated within the retirement account is less than your distributions, then you have to make up the difference from principal by selling some investments, whether it be the principal from fixed interest investments, or the proceeds from the sale of equity/stock investments, whether they generated gains or losses within the retirement plan.
With a long horizon, we usually recommend separating you account into 2 or more IRA accounts. Also, you might consider a plan to get you to the year you will become 55, and see if your employer’s plan allows you to withdraw then if you separate from service, rather than being tied up in a SEPP IRA to the later of 59 1/2 or 5 years.
2014-03-08 01:51, By: dlzallestaxes, IP: [188.8.131.52]