120% Midterm AFR
L1: 120% Midterm AFRI’m considering starting my SEPPsoon but am concerned about the crazy low interest rates going forward. As a result I’m thinking about starting it at the end of this month (Sept) to get the 1.28 rate even thought I’d like to do it later. As a result I have 2 questions.
1) Is it the case that the official Sept numbers have not yet come out but should some time this week?
2) I am confused about the sites predictions for the Sept rate. If I understand it right the site is predicting the Sept rate would by 1.04, even lower than Aug. Is this prediction still reasonable after looking at the recent spike in interest rates? It seems to me that at these levels we should be popping back up to something in the range of 1.28 again.2012-08-19 18:06, By: Dan, IP: [184.108.40.206]
L2: 120% Midterm AFR
They come out whenever the IRS releases them – they don’t have a schedule, but most often come out sometime between the 22nd and the 28th of the month.
We use a formula to do the estimated interest rate – the same basic formula that we have been using January 2004 – sometimes it is right on, but mostly its is within a few basis points of the published rates.
In terms of an interest rate spike – there hasn’t been any spike – look at the 3, 5 , 7 and 10 year treasury rates from July 16 to August 14. Twenty basis points over a month is seldom called a spike.
2012-08-19 18:24, By: Gfw, IP: [220.127.116.11]
L3: 120% Midterm AFRThanks for the quick response. I see where this is coming from now that I understand the time frame under question. The spike I was referring to was just over the last few days.2012-08-19 19:10, By: Dan, IP: [18.104.22.168]
L4: 120% Midterm AFRAre there any forecasts or predicitons for where this rate will be in a year or so? A 1 percent changes my annual amount by a several thousand. Just a few years ago the rate was several points higher. I’m considering the amoritization method so I’ll be locked in and I was hoping to be able to withdraw a little more.
Should I wait? Should I consider the min. dist. method which will vary each year? Will the min. dist. method go up with the MidTerm AFR in a linear fashion?
Thanks in advance.2012-08-30 16:46, By: 72TEE, IP: [22.214.171.124]
L5: 120% Midterm AFRPredictions of interest rates are usually not worth much. Rates are low enough now that they cannot go much lower and if they rise, it will probably be at a slow pace.
Using the MD method will not help you since they generate an initial distribution around 35% lower than the two fixed dollar methods. And the MD method will not increase your annual amount with higherinterest rates. Your account balance would have to increase considerably, about 50% to offset the 35% shortfall going in.
While we don’t generally recommend adopting a recalculation plan because of added complexity and new calculations required each year, it should be recognized that such a plan will allow you to start your plan without the 35% shortfall, and still increase your distribution if interest rates rise throughout the plan and your investments returns are decent. Each year at the same date you would use the current account balance, current highest interest rate for the two prior months, and your attained age at the end of the calculation year to determine your annual distribution amount. IRS has clearly approved recalculated plans, but they see so few of them they are likely to result in a greater chance of an IRS inquiry and review of your calculations. So you would have to be very sure you understand how to do these calculations and then make doubly sure your annual calculation is correct.2012-08-30 20:32, By: Alan S, IP: [126.96.36.199]
L6: 120% Midterm AFRYou may read about annual re-calculation by clicking on the articles tab at the top of the page.
As GFW pointed out to me, I will share with you. Can you afford this method ifthe interest rategoes lower?2012-08-30 21:54, By: Scott, IP: [188.8.131.52]
L7: 120% Midterm AFRMy (limited) understanding of the amortization and annunitized calculation options were that I do the calculation ONCE, initially, using CURRENT (or within 2 months of current) 120% of MT rate and that CANNOT CHANGE for FIVE years no matter what or face the bust penalties. This was backed up by a 45 minute phone conversation with the IRS in the IRA/Pension department. He seemed extremely knowledgeable.
My two big issues are taking this straight out of my gov’t TSP (a qualifying 401(a) plan) to avoid NC state taxes. The other issue is I was planning on a figure that would require interest rates to be about one percent higher than they are right now. Using the current calculators leaves me a few hundred short per month. When I plug in 2.5% it comes to just what I wanted to pull out each year. I can probably delay starting this until the following year (retiring in June) but that’s about it.
Thanks again for the info.2012-08-31 02:27, By: 72TEE, IP: [184.108.40.206]
L8: 120% Midterm AFRI believe that the chances of these interest rates doubling in the foreseeable future are about -0-, regardless who is elected president, even if we get rid of everyone in Congress.
If you would like some informed ideas, I suggest that you begin by giving us your facts :
Date of Birth
Home value & mortgage balance
Projected annual earnings
Other portfolio and investment income outside of a retirement plan
This way we can check your calculations, and suggest some solutions. For example, you could take a full annual distribution for 2012, rather than only a 33% distribution for Sept-Dec. That would give you 8 months more to use to cover shortfalls for the next couple of years, or more. But your tax bracket must be taken into consideration for 2012, and future years.
You could split your account into 2 or more so that you could supplement the SEPP 72-T distributions (without the 10% penalty) with a 2nd SEPP 72-T started next year, and/or non-SEPP distributions subject to the 10% penalty.
It might be advisable for you to consider asking a tax or financial planning professional familiar with SEPP 72-T to help you with the applicable planning, spreadsheets, etc.2012-08-31 05:06, By: dlzallestaxes, IP: [220.127.116.11]
L9: 120% Midterm AFR”””My (limited) understanding of the amortization and annunitized calculation options were that I do the calculation ONCE, initially, using CURRENT (or within 2 months of current) 120% of MT rate and that CANNOT CHANGE for FIVE years no matter what or face the bust penalties. This was backed up by a 45 minute phone conversation with the IRS in the IRA/Pension department. He seemed extremely knowledgeable.”””
Another IRS agent who is not aware of recalculated amortization plans. Obviously, if the plan is recalculated every year, the distribution is not fixed and varies every year with the new calculation. This is why these plans are usuallynot recommended…….you will probably have to “educate the IRS” with all the letter rulings that have approved such plans, and that can be nerve wracking and time consuming. That said, if there ever was a time to consider recalculation it would be now if you need higher rates at some point during your plan to increase the annual distributions.
It may take a couple years or more for interest rates to rise, but for a longer plan such as 7 years or more, they have alot of room and time to increase.2012-08-31 20:04, By: Alan S, IP: [18.104.22.168]
L2: 120% Midterm AFRReading Dan’s post, I am confused by his 1.28 rate. The tables I am looking at show the July 120% rate to be 1.10% and the August 120% rate to be 1.06%, as I am also considering beginning a SEPP plan in September. Am I looking at the wrong Tables? The SEPP plan I am considering is a transfer from an Inherited Spouse’s IRA. The transfer will be completed in the new few days. Is it allowable to start the SEPP already in September and want to make monthly payments. Are we required to prorate since we are doing monthly payments or can the first partial year be a full year’s distribution?2012-09-06 15:01, By: Sandy, IP: [22.214.171.124]
L3: 120% Midterm AFR”The SEPP plan I am considering is a transfer from an Inherited Spouse’s IRA. The transfer will be completed in the new few days.”
Explain your situation, because depending upon your situation, you might not need a SEPP.
There are 2 different situations, with considerably different results.
1. You used the term “INHERITED SPOUSE’S IRA”. This term is professionally used to denote an IRA that is electronically transferred trustee-to-trustee to a newly created account titled ” INHERITED IRA FOR MARY JONES AS BENEFICIARY OF JOHN JONES, DECEASED” .
If that is your situation, then you are not subject to the 10% penalty for withdrawals before age 59 1/2. ( This would be exclusion # 4 for 1099-R box 7.) This is obviously the preferable approach if you are < 59 1/2 and expect to take distributions before reaching 59 1/2. 2. If you rolled his IRA over to an IRA in your name, then the exception # 4 would no longer apply, and you would have to use a SEPP and its requirements. (NOTE TO GFW -- YOU MIGHT WANT TO START SANDY'S POSTING & MY RESPONSE AS A NEW THREAD.)2012-09-06 16:33, By: dlzallestaxes, IP: [126.96.36.199] L4: 120% Midterm AFRI've researched both options, but maybe I'm missing something. If we do option 1, will surviving spouse be allowed to name a new beneficiary or will the contingent beneficiary on deceased spouse apply? Deceased spouse was also under 59 1/2 when he died. Surviving spouse is only 44, so long time until 59 1/2. What other info do we need to see if we qualify for #1? We want to make sure that there is substantial money left for surviving spouse's retirement and not sure how disciplined she will be if she can take any money whenever she wants without penalty, also.2012-09-06 18:13, By: Sandy, IP: [188.8.131.52] L5: 120% Midterm AFRThe surviving spouse who takes the IRA as an INHERITED IRA can name her own beneficiaries. The age of the decedent would only be relevant if he was 70 1/2 when he died. The surviving spouse being under 59 1/2 has complete control as to taking any amount between -0- and 100% of the INHERITED IRA in any year. There is no 10% penalty on distributions from INHERITED IRAs under 59 1/2. ( The contingent beneficiary on decedent's IRA only applies if the primary beneficiary had pre-deceased the owner of the IRA when he dies.) No one can be sure that anyone can be disciplined or control how much she would take. If she is "not good with money", then her husband probably did her a disfavor by not naming a trust, and a trustee, to control his retirement funds on her behalf upon his death. This is now going beyond the scope of this website, which is limited to advising that a SEPP might not be necessary in this situation.2012-09-06 18:30, By: dlzallestaxes, IP: [184.108.40.206] L6: 120% Midterm AFRSandy: DLZ has clearly spelled out the rules for what appears to be your situation. However, I would likefor you to clarify your situation by answering or commenting on the following: Are youthe surviving spouse of a deceased IRA owner of either a Traditional or Roth IRA? Were youthesole, 100%Primary Beneficiary of subject IRA? When you state ... "The SEPP plan I am considering is a transfer from an Inherited Spouse's IRA. The transfer will be completed in the new few days." do you mean the IRA has already been "inherited" once and you are now "inheriting" it for the second time? If so then you must be the "non-spouse beneficiary" of the original IRA owner. Please clarify. There are only two exceptions to the 10% Early Distribution Penalty and they are 1. death and 2. disability. The SEPP Plan or Section 72(t) exception is usedwhen these two exceptions don't apply. Too many times a surviving spouse or non-spouse beneficiary under age 59.5 go astray with bad advice from people who don't understand the beneficiary distribution rules. These rules are not that complicated to do right but can cause real problems if done wrong. Jim F2012-09-06 19:18, By: Jim F, IP: [220.127.116.11] L7: 120% Midterm AFRIt is a traditional IRA and the spouse isthe 100% beneficiary. Paperworkto retitle or transferhas not been completed andam trying to determine if it is best to transfer the IRA intosurviving spouse'sname and do the SEPP, becausethere willbe aneed for some of the money or if I can do what was suggested - title it correctly and take whatever amount of distributions whenever they are needed. I totally agree - I want to do this right!2012-09-06 20:16, By: Sandy, IP: [18.104.22.168] L8: 120% Midterm AFRSandy: After reading your last post I have a new question; are you the beneficiary of the IRA in question or are your the advisor for the beneficiary? If you transfer the IRA into the surviving spouse's name you CAN'T subsequently re-title it into an Inherited IRA. It must go from the deceased IRA owner's name directly into the Inherited IRA title. Since the spouse is the 100% Primary Beneficiary whose age is less than 59.5, this is a "no brainer!" Set up the Inherited IRA for the spouse who can then withdraw whatever funds are needed. Since the deceased IRA owner had not reached "Required Beginning Date" which is April 1st of the year AFTER reaching age 70.5, the surviving spouse does not have to withdraw any funds unless needed. Jim F2012-09-06 20:44, By: Jim F, IP: [22.214.171.124] L8: 120% Midterm AFRSandy, What should be done here is to transfer the spousal inherited IRA into an inherited IRA for the surviving spouse. The surviving spouse can then take any distributions needed without penalty. See IRS Pub 590, p 49 for the penalty exceptions including beneficiaries. Surviving spouse should name her own successor beneficiary on the inherited IRA. When you refer to the 5 year rule, it is possible now that you are considering RMD issues. For a sole surviving spousal beneficiary who maintains an inherited IRA as recommended here, RMDs do not begin until the year the deceased spouse would have reached 70.5. If the surviving spouse reaches 59.5 before that year, she can then assume ownership of the IRA before any RMDs are requiredand take penalty free distributions because she is then over 59.5. Her RMDs as the owner will start at 70.5. For a 44 year old surviving spouse, it would be very bad judgement to assume ownership or roll the inherited IRA over to her own and then start a SEPP. That would require 15 years of mistake free inflexible distributions to avoid penalty, and the penalty can be avoided without any of these restrictions by simply maintaining an inherited IRA until the surviving spouse reaches 59.5. Note that the inherited IRA can be rolled over at anytime, but once done can never return to inherited status. It is very clear that this should be set up as an inherited IRA and that will avoid the SEPP.2012-09-06 21:17, By: Alan S, IP: [126.96.36.199] L6: 120% Midterm AFRI also researched the rule about taking all money out within 5 years with no penalty. What you're referring to is separate from the 5 year rule and only applies to spouses? One more question - is there a specific reference for the rule mentioned above with regards to inherited spousal IRA'swith no 10% penalty in the Code? Thanks!2012-09-06 19:40, By: Sandy, IP: [188.8.131.52] L7: 120% Midterm AFRWhere are you doing your research? IRS Pub 590 will answer all of your IRA questions, including the ones about Inherited IRA's and the 5-year rule you mentioned in this last post. Go to theIRS web site and search for Pub 590. I tried to post a link but there's a temporary block for me. GFW will fix it. Jim F2012-09-06 20:57, By: Jim F, IP: [184.108.40.206] L2: 120% Midterm AFRDAN-- the latest post on this ramblingthread with multiple people postingquestions, caused me to reread the posts, starting with your first post. I wanted to say that Sandy is correct in questioning how you can use the June '12 rate of 1.28% in your calc for a SEPP that you wanted to start in SEPT. '12. That window closed when you did not get first payment issued by8/31/12, since the rate for one of the two months prior to month of first payment must be the one used in your calculation, (or a rate LOWER than one of those 2 rates). KEN2012-09-06 16:51, By: Ken, IP: [220.127.116.11] L3: 120% Midterm AFRI find it interesting that every question was answered, except by Sandy as to whether or not he/she is an advisor or taxpayer doing research. There is no problem with either situation because everyone is welcome to this website.2012-09-07 19:08, By: dlzallestaxes, IP: [18.104.22.168] L4: 120% Midterm AFRWell QE3 is a go so hang on! In its statement, the Federal Reserve said it would keep the federal funds rate at zero to 1/4 percent at least through mid-2015. The Federal Reserve launched another aggressive stimulus program on Thursday, saying it will buy $40 billion of mortgage debt per month and continue to purchase assets until the outlook for jobs improves substantially.2012-09-13 16:50, By: bob_85364, IP: [22.214.171.124] L5: 120% Midterm AFRBob_85364... hang on as the rates go further down. If the fed keeps buying, they will never go up. It is merely a move by teh fed to save Omama and by Bernake to save his job. The market will go up, but probably nothing more. 2012-09-13 17:11, By: Gfw, IP: [126.96.36.199] L6: 120% Midterm AFRSince it is the Fed's that are artificially keeping the rate in the basement, couldn't our House and Senate members be requested to force the IRS to use a 3 year average 120% rate as a forth option, instead of one of the last 3 Months? Or capping a minimum SEPP rate at 2.5% or 3%. These 1% to 1.15% rates are killing my ability to retire. I am a Firefighter with a Qualified State (Florida - FRS) Retirement "Investment Fund" ($1,010, 000 balance), that I want to rollover to an IRA and 72(t). I was born July, 1961 and my Wife was born in August 1965. I'm trying to stay at work until January 2016, so I can have reached the calendar year I turn 55, but that's not working good for me.2012-09-27 23:32, By: Mike, IP: [188.8.131.52] L7: 120% Midterm AFRI wouldn't hold my breath waiting for any help from Congress on this issue. Unfortuneately, they have an avalanche of critical issues to resolve immediately upon return from recess, that they will have some real problems resolving. Do you have a plan that is a DEFINED BENEFIT plan? Is so, the following section from the Pension Protection Act may resolve your problem: >>>>>>>>>>>
[PPA] SEC. 828. WAIVER OF 10 PERCENT EARLY WITHDRAWAL PENALTY TAX ON CERTAIN DISTRIBUTIONS OF PENSION PLANS FOR PUBLIC SAFETY EMPLOYEES.
] (a) In General- Section 72(t) of the Internal Revenue Code of 1986 (relating to subsection not to apply to certain distributions) is amended by adding at the end the following new paragraph:
`(10) DISTRIBUTIONS TO QUALIFIED PUBLIC SAFETY EMPLOYEES IN GOVERNMENTAL PLANS-
`(A) IN GENERAL- In the case of a distribution to a qualified public safety employee from a governmental plan (within the meaning of section 414(d)) which is a defined benefit plan, paragraph (2)(A)(v) shall be applied by substituting `age 50′ for `age 55′.
`(B) QUALIFIED PUBLIC SAFETY EMPLOYEE- For purposes of this paragraph, the term `qualified public safety employee’ means any employee of a State or political subdivision of a State who provides police protection, firefighting services, or emergency medical services for any area within the jurisdiction of such State or political subdivision.
2012-09-27 23:59, By: Alan S, IP: [184.108.40.206]
L8: 120% Midterm AFRThanks for the fast reply, but I already have been down that road. I’m in an “investment plan” not a “retirement plan”. I was in the retirement plan (traditional monthly payments) until 3 years ago (back when the 120% rate was always running above 3%), but took a one-time conversion to the lump sum investment plan.
Mike2012-09-28 00:08, By: Mike, IP: [220.127.116.11]
L9: 120% Midterm AFRDid someone advise you to do that, or did you do it without seeking professional advice ?2012-09-28 00:12, By: dlzallestaxes, IP: [18.104.22.168]
L9: 120% Midterm AFRMike…
An investment plan covers a lot of bases and could be defined by any of 100,000 or more products.
For our benefit, can you define your “Investment Plan”? What did you convert to a “lump sum investment plan”?2012-09-28 00:45, By: Gfw, IP: [22.214.171.124]