5-Year Pro-Rated SEPP

L1: 5-Year Pro-Rated SEPP
Holidays are always a good time to catch up on items that I wanted to do, but just didn’t seem to find the time. We used the last few days to finish the mobile/tablet version of the IRA Tools programs and to expand/update the programs for a few new options.
We frequently get questions on a 5-Year SEPP and how to handle pro-rated distributions. The latest version on the IRA Tools programs will now allow pro-rated distributions on a 5-Year plan. Comments welcome…

The report that follows was generated using the ‘Screen Calculation’ option from the Mobile/Tablet version of the IRA Tools program. It is a
5-Year SEPP plan where the first year distribution was distributed pro-rated based on the number of months left in the first year. The result is that in the last year (year 6 on the report) the distribution is also pro-rated so that the total
distribution over the 5-Years is equal to 5 times the calculated annual distribution.

If the illustration is based on a 5-Year plan, the dates covered by the plan are also included in the report. These are the same screen calculations used in the regular version of the IRA Tools programs.

SEPP Plan Assumptions

Plan Age
55

Account Valuation Date
08/31/2011

Total IRA Accounts
$500,000

SEPP Plan Account
$400,000

SEPP Interest Rate
4.50%

Est. Investment Rate
5.00%

1st Distribution Date
9/11/2011

Date Age 59.5
3/11/2016

5 Year Date
9/11/2016

1st Modification Date
9/12/2016

Minimum Distribution Method

Distribution Factor
29.600

SEPP Payment
$13,513.51

Amortization Method

Distribution Factor
16.183

SEPP Payment
$24,716.54

Annuity Method

Distribution Factor
16.309

SEPP Payment
$24,526.34

Assuming the 5-Year rule, when can SEPP payments be modified? The five year period begins with the date of the first distribution and ends on the last day of the fifth year. During this five year period, the total SEPP withdrawals should be
equal to five (5) times the Planned Annual Distribution. The dates covering the 5-Year period…

Year: 1 = 09/11/2011 – 12/31/2011
Year: 2 = 01/01/2012 – 12/31/2012
Year: 3 = 01/01/2013 – 12/31/2013
Year: 4 = 01/01/2014 – 12/31/2014
Year: 5 = 01/01/2015 – 12/31/2015
Year: 6 = 01/01/2016 – 09/11/2016

Year-By-Year Analysis of SEPP Values

IRA Value Allocated to SEPP Plan: $400,000

Yr
Atn
Age
Annual
Payment
Interest
Earnings
Year End
Balance

1
55
8,239
5,909
397,670

2
56
24,717
18,648
391,602

3
57
24,717
18,344
385,229

4
58
24,717
18,026
378,538

5
59
24,717
17,691
371,513

6
60
16,478
11,738
366,773

Year-By-Year Analysis of Total Values

Total IRA Account Value: $500,000

Yr
Atn
Age
Annual
Payment
Interest
Earnings
Year End
Balance

1
55
8,239
7,418
499,179

2
56
24,717
23,723
498,185

3
57
24,717
23,673
497,142

4
58
24,717
23,621
496,047

5
59
24,717
23,567
494,897

6
60
16,478
15,817
494,237

The Cost to Bust a SEPP Plan

Yr
Annual
Payment
Sum of
Payments
Pre-59.5
10% Penalty
Retro.
Interest
Cost To
Bust

1
8,239
8,239
824
0
824

2
24,717
32,955
3,296
33
3,329

3
24,717
57,672
5,767
165
5,932

4
24,717
82,388
8,239
395
8,634

5
24,717
107,105
10,711
725
11,436

6
16,478
123,583
10,711
1,153
11,864

2011-11-27 15:29, By: Gfw, IP: [205.178.73.77]

L2: 5-Year Pro-Rated SEPP
GREAT JOB. Very informative, and very comprehensive.
I suggest adding a note that the first year is 4 payments, and the last year is 8 payments, even though it shows the 6th calendar year going until 9/11/2016.
2011-11-27 16:42, By: dlzallestaxes, IP: [96.227.217.194]

L3: 5-Year Pro-Rated SEPP
Dlz… Good idea. I modified the notes as a follows…
Assuming the 5-Year rule, when can SEPP payments be modified?
The five year period begins with the date of the first distribution and ends on the last day of the fifth year. During this five year period, the total SEPP withdrawals should be equal to five (5) times the Planned Annual Distribution.
Payments in the first period would be equal to 4/12s of the Annual Distribution. Payments in the last period would be equal to 8/12s of the Annual Distribution. All other payments would be 12/12s of the Annual Distribution. The dates covering the 5-Year
period…
The Cost to Bust section outlines the penalties & past due intererst.
2011-11-27 18:50, By: Gfw, IP: [205.178.73.77]

L2: 5-Year Pro-Rated SEPP
Looks good.
Need footnote with respect to Yr 6 showing distributions all taken 3/11 or later? Otherwise, if distributions were taken monthly there would be a penalty on the first two (or 3 if March taken before 3/11) distributions that year.
2011-11-27 17:30, By: Alan S., IP: [24.116.66.40]

L3: 5-Year Pro-Rated SEPP
This is where the 5-year plan with pro-rata distributions becomes somewhat confusing and why I have always been a believer in only taking annual payments.
In “Arnold v Commissioner”, the tax court seemed to use a fiscal year to determine the beginning and the end of the 5-year period and limited the withdrawals during that period to 5 times the annual amount.
However, withdrawals are taxed and tracked on a calendar year basis. If this is right, then the final 9/12s should be able to be taken any time in that 6th period and there would be no violation of the 5-year rule.
It would have been a lot more clear if Arnold was taking monthy withdrawals instead of annual.
2011-11-27 17:47, By: Gfw, IP: [205.178.73.77]

L4: 5-Year Pro-Rated SEPP
Maybe you need a note differentiating the fact that the plan cannot be terminated until 9/11/2016 under the 5-year provision, or the “busting” 10% penalty would apply to all distributions before 3/11/2016 when he became 59 1/2.
2011-11-27 17:56, By: dlzallestaxes, IP: [96.227.217.194]

L5: 5-Year Pro-Rated SEPP
Gordon:
I find the interest rate section confusing but easy to fix, I think.

SEPP Interest Rate
4.50%

Est. Investment Rate
5.00%

Change the first line to read …
“SEPP Interest Rate (120% AFR)”
and use the current interest rate. It’s been quite some time since we had 4.5% for this figure and it is too close in value to the “Est. Inverstment Rate” which will cause confusion.
Jim F
2011-11-30 15:12, By: Jim F, IP: [70.167.81.119]

L6: 5-Year Pro-Rated SEPP
Jim… thanks.
This was a quick sample where I changed an exiting file in the Ira Tools program – the 4.5% rate is the one used by the IRS in their sample. The actual interest rate variable can be modified by the user and defaults to the current 120% rate.
I’ll have to take a look at the wording – one issue that I am dealing with is that the same report is created on a mobile/tablet device – very narrow screen on an iPhone or Android phone – and we are trying to keep the reports identical on both the mobile
and PC versions of the program. Right now, both produce identical reports right down to the full PDF reports.
2011-11-30 15:29, By: Gfw, IP: [205.178.73.77]

L7: 5-Year Pro-Rated SEPP
I understand but right now I can’t appreciate the problem of working with small displays like a mobile phone since I just use my cell for calls and an occasional text.I’ll be getting my first “smart phone” next month.
Ah for the days of two tin cans and a long string!
Jim F
2011-11-30 17:24, By: Jim F, IP: [70.167.81.119]