72T & Defined Benefit Plan

L1: 72T & Defined Benefit PlanI am eligible to retire and take a defined benefit from a state pension plan (public employee). The plan offers a one time distribution. In my case, $173000. If I don’t take it, I cannot get it later. If I do take it, my defined monthly benefit decreases proportionally. I can handle the decrease but want to supplement my monthly benefit with SEPP payments by taking the $173000 into an IRA (I figure it to be legacy money upon my demise). Any advice on how to handle this? What are the best investment vehicles within the IRA to do this? 2008-12-10 07:46, By: doravito, IP: [64.18.36.148]
L2: 72T & Defined Benefit PlanYour investment vehicles have to provide cash flow to make the distributions when you want them so long as they equal the correct annual total. You should indicate your age so we can give you better, more informed responses. Usually we recommend splitting your IRAs into 2 parts — SEPP 72-T and separate future Emergency Fund.There are numerous postings on this website which can help you become familiar with the various nuances. Also, there is a terrific book available thru here whih is an invaluable guide.You have to decide your comfort level with equities (common stocks/mutual funds) vs. fixed-interest investments. Remember that all distributions from retirement accounts are taxed as ordinary income up to 35%, while dividends and capital gains on growth are taxed NOW at special tax rates maximized at 15%. Further, non-SEPP 72-T IRA accounts can be converted to ROTH IRA accounts (if eligible) so that you pay the tax now ( on probably lower values), and all future income and growth in the ROTH IRA will never be taxed ( under current tax laws).2008-12-10 13:40, By: dlzallestaxes, IP: [96.245.168.66]

L2: 72T & Defined Benefit PlanHello doravito:I think you are asking a multi-part question as follows:1. Is the net present value of my periodic benefit reduction for my lifetime worth more or less than $173,000. If more, then you should not take the lump sum distribution; if less, then you should take the lump sum distribution. By the way, the normal answer is “less” but not always and there are some pretty easy ways to model out the answer.2. Assuming you do take the lump sum distribution; put it in an IRA and start SEPP payments; what are the payments (easy to calculate using the calculators here) and how do they compare with the reduction in the periodic benifit caused by taking the lump sum.3. Is the sum of the two benefit streams greater or less than taking the full pension benefit and/or what is the remainderman lumpsum of the $173,000 N years in the future when your SEPP plan ends.All this being said, it is not as tough as it sounds. It is just a way to compare periodic benefit streams versus lump sums to figure out which is the most advantageous to you.TheBadgerwjstecker@wispertel.net2008-12-10 15:52, By: TheBadger, IP: [72.42.108.111]

L2: 72T & Defined Benefit PlanMy age is 56. Beneficiary is 52. You mentioned that the investment vehicles have to provide an amount equal the amount of the SEPP? Can they exceed the amount with the excess remaining in the IRA? If they don’t meet the SEPP, can the difference come out of the principal? I can’t imagine finding a vehicle that would provide the exact amount of the SEPP.I am interested to know what vehicles work best to accomplish these goals.2008-12-10 16:04, By: doravito, IP: [24.154.193.220]

L2: 72T & Defined Benefit PlanI think you are asking a multi-part question as follows:1. Is the net present value of my periodic benefit reduction for my lifetime worth more or less than $173,000. If more, then you should not take the lump sum distribution; if less, then you should take the lump sum distribution. By the way, the normal answer is “less” but not always and there are some pretty easy ways to model out the answer.ANSWER: Less. The $173000 amount is the maximum amount allowed while leaving approximately $130000 in the defined benefit plan.2. Assuming you do take the lump sum distribution; put it in an IRA and start SEPP payments; what are the payments (easy to calculate using the calculators here) and how do they compare with the reduction in the periodic benifit caused by taking the lump sum.ANSWER: It is a little less but not unreasonable.More importantly,the lump sum amount would provide an amount of money to be left to heirs, and provide emergency funds that I would not otherwise have so I am motivated to take it for those reasons. I can always supplement my income by “moonlighting” etc. ANSWER TO #3: Slightly less. I am wondering about after the SEPP ends but figure that average returns on the investment would continue to provide an income stream.3. Is the sum of the two benefit streams greater or less than taking the full pension benefit and/or what is the remainderman lumpsum of the $173,000 N years in the future when your SEPP plan ends.All this being said, it is not as tough as it sounds. It is just a way to compare periodic benefit streams versus lump sums to figure out which is the most advantageous to you.2008-12-10 16:14, By: Doravito, IP: [24.154.193.220]