5 Year Rule
L1: 5 Year RuleAt age 57, naturally I would prefer to set up a SEPP and then be done with it when I turn 59.5. However, I understand the rule that it must continue for the longer of 5 years or until age 59.5. It occurred to me, however, that by taking the first annual distribution in December 2010, distributions 2-4 in the respective periods of 2011-2013 and the fifth annual distribution in January 2014, five annual distributions will have been taken in a time period of 4 years and 1 month. My question: will the IRS consider the rule to have been met in this scenario? Or would they require that the funds remain untouched following the fifth distribution until five full years have passed since the first distribution in December 2010? If it’s the former, the SEPP could be ended 11 months sooner, which is a significant benefit for someone who has already passed age 59.5. I’ve read through the IRS publications and find nothing that addresses this question specifically. Is anyone aware of a ruling on this question or know of an explanation of the five year rule that I may have overlooked?2010-11-18 18:42, By: John, IP: [184.108.40.206]
L2: 5 Year RuleThe five year rule is simple…the plan cannot be modified for 365 days times 5 yearsplusabout 2 more days from the date of the first distribution.
Tomake it easier to calculate your first modification date and to account for any leap years, use ourcalculator at http://72t.net/72t/Calculator/First/Modificaton/Date
You may want to find and read… Arnold v. Comm., 111 TC No. 12 (1998).
2010-11-18 18:52, By: Gfw, IP: [220.127.116.11]
L3: 5 Year RuleMany thanks Gfw. The Arnold v. Comm was precisely the guidance I was looking for.2010-11-18 21:42, By: John, IP: [18.104.22.168]
L4: 5 Year RuleNote that Arnold vrs Commissioner clarifies what your modification date is, but does not clarify what your options are in the meantime. The decision is also indicative of what you CANNOT do.
The ruling indicates that prior to 12/15 you cannot take a distribution that does not meet the requirements of a SEPP distribution. But it does not mean that you cannot take any distribution.
We had a post recently with exactly the same scenario you outlined, ie. the window between your initial distribution and whatcould be the final distribution was the smallest possible. Your initial distribution in Dec and the 5th annual distribution in January, 2014was over a37 month period.
The point is that when 2015 begins, you have choices:
1) You can take nothing because you have satisfied your 60 month min distribution requirement and have also reached 59.5
2) You can take another full annual distribution if you wish.
3) You can take 11/12 of your annual distribution based on pro rating by the month.
You cannot do anything other than the above 3 options since your modification date will not yet have been reached in 2015, and something different would be outside the realm of a valid SEPP distribution.
In summary: Your distribution pattern does not change the modification date at all, but it does affect your options in your initial calendar year and your final calendar year.2010-11-19 03:08, By: Alan S., IP: [22.214.171.124]
L5: 5 Year RuleI’m in the same boat and want to make sure I’m really clear on this. (Don’t want to bust the plan in the final year by making a foolish mistake.) I’ve read several forum threads on this subject and am pretty sure I understand the rule, but please bear with me and make sure I’m right. (By the way, all you folks who answer questions on this forum are *outstanding* people. Thanks for taking your time to help the rest of us.)
My birthday is 5/28/1954. On Nov 23, 2009, I started a SEPP plan and withdrew my entire annual amount for that year. In 2010 (and continuing through 2013), I have been taking my annual amount in quarterly payments. The date that is 5 years from the start of the SEPP plan is 11/23/2014. I will have withdrawn 60 months of my SEPP plan by 12/31/2013 and I will also be at least 59.5 on that date. So, the question is, of course, what about 2014? If I understand everyone’s advice correctly I can:
1) Take nothing out prior to 11/23/2014 and then take any amount out I want (including nothing) after 11/23/2014. If I understand the rationale behind this, it’s as if I decided to take my withdrawal as an annual payment for 2014 on 12/1/2014 instead of quarterly as in previous years, and then change my mind without penalty because it’s on or after 11/23/2014 and I’ve satisfied both my 5-year and 59.5 requirements.
2) Take out 11/12th of the amount allowed under my SEPP plan for 2014 prior to 11/23/2014 and then take out any additional amount I want (including nothing) after 11/23/2014.
3) Take out the full amount allowed under my SEPP plan for 2014 prior to 11/23/2014 and then take out any additional amount I want (including nothing) after 11/23/2014.
What I don’t really understand is why the following isn’t also an option:
4) Take out any amount from 0 to the full amount allowed under my SEPP plan for 2014 prior to 11/23/2014 and then take out any additional amount I want (including nothing) after 11/23/2014. It seems to me I would only bust my SEPP plan if I tried to take out more than the amount allowed for 2014 prior to 11/23/2014. Other postings on this site indicate that you don’t bust your SEPP plan by changing how the money is paid within a calendar year. At the start of each year, can’t you decide differently for each year whether you want the payment annually, quarterly, or monthly, and on what date each month you want the distribution? So, for 2014, can’t I decide to take my annual withdrawal in whatever payment plan I want, and then on or after 11/23/2014 scrap whatever is left to do because I’ve now satisfied the 5-year, 59.5 requirement?
Thanks in advance for your comments!!2010-12-06 08:17, By: MikeP, IP: [126.96.36.199]
L6: 5 Year RuleI think Alan covered all the options. The 11/12 option is because the plan only existed for 11 months so taking 10/12 would not be an option and would bust the plan. He also stated that you could take12/12 (full amount).
Yes, after 11/23/2014 you can do what you want. However, if you take a withdrawal after the SEPP end, you will probably receive 2 1099 forms – one for before theplan endsand one for after the end of the plan.2010-12-06 11:52, By: Gfw, IP: [188.8.131.52]
L7: 5 Year Rule> I think Alan covered all the options. The 11/12 option is because the plan only existed for 11 months so taking 10/12 would not be an option and would bust the plan. He also stated that you could take12/12 (full amount).
I was rather bleary and didn’t remember that Alan had covered the “full amount” case in his post. I modified my initial post to reflect this.2010-12-06 12:16, By: MikeP, IP: [184.108.40.206]
L8: 5 Year RuleMike,
Note that the original post included a starting month of December and I indicated the 11/12 option there.
But your plan started in November and it would change the 11/12 to 10/12. But that’s just my opinion because I am assuming that your plan ENDS in November and therefore your pro rate factor ends in October, ie 10/12. As far as I know, the IRS has not clarified whether you should count the final month or not, but in most similar situations where the first month is counted, you would not count that same month again or you would come up with 61 months instead of 60.
As far as I know, most people do count the final month and the IRS does not question it. Fewer people stop the count with the month prior to the ending month, and have heard of no IRS reaction to that either. So if you elect to pro rate your final stub year, you can take yourpick, but I would be happier if the IRS clarified the issue since an entire plan could hang in the balance.2010-12-07 00:56, By: Alan S., IP: [220.127.116.11]
L9: 5 Year Rule> But your plan started in November and it would change the 11/12 to 10/12. But that’s just my opinion because I am assuming that your plan ENDS in November and therefore your pro rate factor ends in October, ie 10/12. As far as I know, the IRS has not clarified whether you should count the final month or not, but in most similar situations where the first month is counted, you would not count that same month again or you would come up with 61 months instead of 60.
Thanks for the clarification. I can see why 10/12 makes more sense. Since I took the initial distribution in the month of November in 2009, my plan was active for 2 months in 2009. So, in the final year, one could argue that the plan is in effect for 10 months.2010-12-07 01:45, By: MikeP, IP: [18.104.22.168]
L10: 5 Year RuleFive-Year RuleIf a retirement account owner dies before the required beginning date for receiving distributions, the beneficiary may distribute the.
melkinny2011-01-12 05:26, By: melkinny360, IP: [22.214.171.124]
L3: 5 Year RuleI understand the essence of this thread and the use of the first mod date calculator …but I would like to have something very simple clarified:
After the five years + 2 days and over 59 1/2 age, does the 72T have to be amended/changed thereafter or does it simply terminate/expire?
Stew Corman2010-12-10 18:05, By: SCORMAN, IP: [126.96.36.199]
L4: 5 Year RuleNothing need to be done – at the laster of age 59.5 or 5 years the plan automatically termiates.
Just keep your documentation, etc for the next 7 years and you should be in great shape.2010-12-10 18:31, By: Gfw, IP: [188.8.131.52]