I am a 54-year-old male. I want to start making 72t withdrawls as soon as possible and want to withdraw the maximum amount in one lump sum. I then would like to take another lump sum as early as legal next year.
I have two IRAs with a combined value of $577,152 as of September 30th. Using a Single Life Expectancy and the Amoritzation method I have come up with an Annual Distribution of $26,466 using the maximum interest of 2.28% [I have filled out a worksheet and
attached it to the end of this post — I do realize it is for my records only].
I assume at this point my next step is to contact Vanguard (where I want to withdraw all the money from) and ask for a distribution and then filling in the distribution date on the form retroactively.I have no problem with them withholding 20% this time
1) Would someone mind checking my calculations?
2) If I want to make my next withdrawl early in the year next year (and probably all subsequent years) can I do an Annual Recalculation? If so, then what are the rules for the following years? Am I commited to always doing an Annual Recalculation based on
the same date?
3) Is there anything else I am missing or need to document?
SEPP Form for Plan Documentation
Calculation Method:Amortization Method
To comply with RR2002-62, all calculations should be done using the Annuity 2003 table.
Life Expectancy [LE]:Single Life Expectancy
Interest Rate: 2.28% for Amortization and Annuity Methods.
To comply with RR2002-62, the maximum rate should be limited to 120% of the Federal Mid-TermAFR for either of the two months immediately preceeding the month that the first payment is to be made. Once established, it should remain
Annual Recalculation of Age, Interest Rate and IRA Balance
Account:Balance: $577,152 as of 9/30/20111
To comply with RR2002-62, the initial valuation date should probably be the December 31 of the prior year, or on a date within a reasonable period before that year’s distribution.
Calculated Annual Distribution:Amount: $26,466
Recalculation Date:If selected, Annual Recalculation will be determined as of _____ (Month) and _____ (Day) of each year based on the account balance as of 12/31 of the previous year.
Recalculation Interest Rate:If Annual Recalculation is selected, the interest rate used will be determined as of the “Recalculation Date” and will be based on the highest of the 120% Mid-Term Applicable
Federal Rate during the two months immediately preceding the “Recalculation Date”.
Stub-Year:The first year’will not’ be treated as a stub year.
IRA Accounts:The following IRA Accounts are included in my initial calculations:
VANGUARD xxxxxxxxxSCOTTRADE xxxxxxxxx
Method To Illustrate
Total IRA Account Balance
Amount Allocated to SEPPPlan
Reasonable Interest Rate – The maximum interest rate that may be used for a SEPP plan is any interest rate that is not more than 120 percent of the federal mid-term rate for either of the two months immediately preceding the month in which the distribution
Reasonable Interest Rate
IRS Penalty Interest Rate
Use Joint Calculations
Use Uniform Table
Report to View:Table of ValuesChart
Calculations are based on Single Life table.
72(t) Annual Payments
1] Minimum Distribution Method
2] Amortization Method
3] Annuitization Method
2011-10-08 11:05, By: Rory, IP: [126.96.36.199]
#1 -Based on your initial withdrawal occurring in October, 2011 your calculations appear to be correct.
#2 – Yes. Typically you would use the previous 12/31 for account balance and 01/01 for a recalculation date which would mean using the previous November or December interest rate. Once the recalculation date is set, it should be used for all future years.
#3 – Read our Planing Pointers
http://72t.net/72t/Planning/Pointersitem “Retain all of your documentation for at least seven years after the plan ends”.
2011-10-08 11:24, By: Gfw, IP: [188.8.131.52]
While withholding can work OK with a 72t plan, it is generally better to pay quarterly estimates. IRA withholding is entirely optional and can be declined altogether. If YOU pay the taxes yourself it is one less “moving part”
that could be misunderstood or cause confusion between you and the IRA custodian.
Also, in a pinch you would rather be late with your taxes than having to bust the plan because money you needed at the time was sitting in the US Treasury rather than at your disposal.
Also, note that recalculation plans will draw extra scrutiny because your distribution will change from year to year and you will have to complete entirely independent calculations for every year in your plan as opposed to just
one calculation. The resulting new calculation can bounce around considerably unless you are in very stable value investments. While the IRS has clearly approved recalc, they see very few of these plans and staff is highly unlikely to understand what they
are looking at. You are much more likely to get an inquiry regarding a recalc plan, and even though the plan holds up this is an unwelcome letter to answer however many years would produce one. Therefore, I tend to advise passing on the potential advantages
of recalc in favor of the potential disadvantages.
2011-10-09 00:56, By: Alan S., IP: [184.108.40.206]
That all makes sense to me.
I will not ask Vanguard to withhold the 20% (however, if they do I will probably not fight it).
I will also avoid recalculating. I have received a couple of letters from the IRS and while both have been misunderstandings (roll-over not reported) it is still an added stress that is not worth it.
This is probably an ignorant question, but is there somewhere on my tax form that I will indicate that my withdrawl is a 72t to avoid such letters?
GW, thanks for your advice also (and for your non-binding verification of my calculations).
2011-10-09 13:45, By: Rory, IP: [220.127.116.11]
When I established a 72t withdrawal plan with Vanguard, they had a form that had to be filled out to initiate the regular withdrawals. One line on that form addressed the withholding, which I set at 15%. As it turned out, this was fairly close to the amount
of tax owed and I stayed with that until the 72t plan was complete. In fact, I am still doing that even though the plan officially ended last year. Since the amount distributed matches my needs fairly closely, I haven’t felt the need to make any changes.
It is likely that I will do so next year, however. I did, of course, check the amounts distributed each quarter and also annually to make sure that the amounts were correct. In all but one case, they were. Fortunately, that was discovered early and corrected
Another thought that occurs to me is that the combined 1-2 withdrawal punch, say in October or November and then again in January, will constitute over 9% of the IRA balance. This seems like a substantial amount to remove in the 1st few months. The ability
of an IRA to sustain its withdrawal schedule depends on both the returns that the market can generate plus the amount withdrawn. By reducing the total amount in the IRA this early on in the 72t plan, it could reduce the odds of successfully completing the
72t plan. I understand that this would be a 1-time event and that future withdrawals would be at the approximately $26.4k per year level but it is easy to underestimate the impact on the earnings potential of an IRA via withdrawing too much too soon.
2011-10-09 16:47, By: Ed_B, IP: [18.104.22.168]
I agree with everything that was responded, except Ed’s last comment. The performance of the investments over the next 15 years or so will have much more to do with its longevity than any “front-loading” of distributions. If I assume a 5% return on investment,
then the front-loading would only reduce the future growth by $ 1,300 compounded, or about $ 25,000 over 15 years, or about the amouny of the “extra” withdrawal.
Worst case, the “plan” would last 28 years rather than 29.
2011-10-10 03:19, By: dlzallestaxes, IP: [22.214.171.124]
All other things being equal, you would be right, Dlz. Consider what happens, though, when a portfolio sustains a 20-25% loss in its 1st year AND has a significant withdrawal. Such is not beyond the realm of possibilty. In fact, relatively recent history
highlights this quite clearly. It can take a portfolio
many years to recover from that 1-2 punch. As we all know only too well an average 5% return does not mean a 5% return in each and every year of the period in question. These days, volatility seems to be running to extremes and anyone taking SEPP payments
would do well to consider its effects on their IRA. Not saying that this will happen, of course, only that it can… and with considerable deleterious effect.
2011-10-10 04:20, By: Ed_B, IP: [126.96.36.199]
Ed, I appreciate you pointing out the large hit my portfolio will be taking (10%). I hadn’t thought of it in quite that way. However, at the moment personal circumstances still leave that as the best option, though that could change by next February.
While knowing that predicting the economy over the short-term is a total crap shoot, I personally feel that it will not be going anywhere significantly positive until we get a new team in Washington DC (and please feel free to read that phrase in a way that
confirms your political beliefs, whatever they may be), which means not until 2013.
If I do end up taking the withdrawl in February it will be because I am in a period of ‘reduced employment’. I am not currently planning on spending it all at that time and will invest what I don’t spend. I will take the tax loss, but I will have to take
that at some point anyway at a slightly smaller rate.
2011-10-10 13:08, By: Rory, IP: [188.8.131.52]
Of course, only you knowall of the details of your financial situation and are in the best position to see the proper course that you should take. My goal and, I suspect, the goal of others on this web site is to put out some ideas for consideration.
Once you have evaluated the merits of those ideas in regards to your particular situation, you will be a better position for making the decision that is best for you.
Personally, I find the thought of taking an entire years’ worth of SEPP payments in one large payment to be somewhat daunting. I suppose that depends, in part, on your thoughts on the direction of the market over that time period. In a risingmarket, taking
out monthly or quarterly payments would leave more in your IRA to grow than taking a single large payment at the begining of the year. In a falling market, removing a large amount of money from the market early in the year might well prove to be the best
Still, this is generic advice that may or may not fit any particular situation. Having had the discussion and considered the ramifications in your own situation, I am hopeful that your decision, whatever it might be, will turn out to be the best one possible
and I do wish you well with it.
2011-10-10 16:10, By: Ed_B, IP: [184.108.40.206]
As suggested by Ed, you might consider taking 2012 distributions as you need them on a monthly or quarterly basis, rather than all in Jan/Feb. This will “cushion” you against such a large initial hit to your balance.
In addition, if you do get another job, then you could stop your SEPP 72-T, and pay the 10% penalty on what you had withdrawn.
2011-10-11 00:57, By: dlzallestaxes, IP: [220.127.116.11]
I accidentally deleted my post and your reply went with it before I could read it. Would you mind answering again the question about quarterly tax estimates?
2011-10-12 12:44, By: Rory, IP: [18.104.22.168]
Rory… You posted your question to a different topic.Regardless of how you take SEPP distributions (annual, quarterly,monthly, etc.) income tax estimates are filed quarterly.
2011-10-12 12:52, By: Gfw, IP: [22.214.171.124]