72t distribution, load,redemption fees effect
L1: 72t distribution, load,redemption fees effectHi ,
This is my 1st time post although I”ve been reading and learning much over the last couple yrs. I just set up SEPP with Fidelity to begin April 1. They sent me complete overview of distribution dates, Fed rate of return, etc. They also noted that back end loads, redemption fees, and transaction fees may result in not meeting IRS requirements as my equal distributions may be less. Does this imply that I will bust plan, or since I may be getting less, that I have no reason for concern? Also since I”m sure I”ll be changing my investment strategy as the years go on, the amount of my distribution will fluctuate possibly year to year, but also to a lesser amount.Thanks,
Mike2008-02-26 14:21, By: keilwerth, IP: [22.214.171.124]
L2: 72t distribution, load,redemption fees effectHello keilwerth:
Your post does not make a great deal of sense. Assuming you have adopted a fixed amortization SEPP plan, say to distribute $50k per year; then, you must distribute $50k per year in cash. These back-end fees, etc. may also be rightfully deducted from your IRA account depending upon what you have invested in; however, with respect to yoru SEPP plan they are irrelevant.
2008-02-26 14:27, By: TheBadger, IP: [126.96.36.199]
L2: 72t distribution, load,redemption fees effectI think you have a misunderstanding how a SEPP 72-T plan works. You think that you set it up, make investments, and then distributue al of the income as your SEPP 72-T distribution. That is not how it works.
You first decide how much you want or need each YEAR. Then you calculate how much you have to set aside, either all or part of your IRA accounts to get that result under any of the 3 methods. Once you start your plan, you are REQUIRED to make the same ANNUAL DISTRIBUTION each year, except the first and last.The first and last years can be prorata based upon the number of months, or you can take a full Annual distribution even if you start your plan late in the year. If your investments do not earn enough income to support the calculated ANNUAL DISTRIBUTIONS, then you have to make up the “shortfall” from the principal invested by selling something when needed. Cash flow is an important component of your planning. For example, if you invest your entire account in a 1 year CD with the interest paid when it matures, that will be after year-end, and there will be no cash to satisfy the first year”s distribution.2008-02-26 17:43, By: dlzallestaxes, IP: [188.8.131.52]
L2: 72t distribution, load,redemption fees effectThanks for the responses. Perhaps I need to provide more info. I have approx 500k in an IRA which set up for SEPP. Payments of approx 14k on 4/1 and 8/1 will be distributed to me on those dates. This is based on Fed rate @120% which is 4.22% for month of Feb. I currently have 6 mutual funds in my IRA and distributions will be taken from each proportionately. Lets say as these distributions take place, some of these funds have redemption fees or perhaps back end load fees. Also during the course of the years I”ll be taking these distributions I may sell a fund and invest in another thus incurring a transaction fee, say perhaps 75.00. Would my annual distribution of apprx 28k be less or would the 1099R show the 28k at years end? Perhaps I”m not understanding this aspect. Thanks again,
keiwerth2008-02-27 11:30, By: keilwerth, IP: [184.108.40.206]
L2: 72t distribution, load,redemption fees effectI forget to mention I”m using fixed amortization rate.2008-02-27 11:32, By: keiwerth, IP: [220.127.116.11]
L2: 72t distribution, load,redemption fees effectMike:
Let me address your comment, “Also since I”m sure I”ll be changing my investment strategy as the years go on, the amount of my distribution will fluctuate possibly year to year, but also to a lesser amount.” Unless your plan includes annual recalculation, your distribution amount should NOT vary as you change investments. Investment performance is NOT an element of the recalculation formula. Please review these rules.
So let”s assume you will not use recalculation and your annual distribution is $28,000. If you instruct your IRA custodian to distribute a “net” amount of $28,000 to you, and if you have sales and othercharges on top of that, then they will distribute more than $28,000 per year to cover these extra charges, and your 1099-R will reflect this increased amount. In order to avoid problems, have them distribute $28,000 gross and withhold sales and other charges from this amount. Of course you will receive less than $28,000 to spend, but this method covers the extra charges.
Go back to your IRA custodian with this approach and see what they say.
Jim2008-02-27 12:15, By: Jim, IP: [18.104.22.168]
L2: 72t distribution, load,redemption fees effectHi Jim,
Thanks. I will call Fidelity about this. Based on them in writing to me about my plan they did indicate my distributions may be possibly less because of these various transaction fees and may result in notmeeting IRS requirements. Based on your response this would indicate a Gross distribution and would not cause any problems. Am I interpreting you correctly? Thanks,
Mike2008-02-27 12:48, By: keilwerth, IP: [22.214.171.124]
L2: 72t distribution, load,redemption fees effectYes, that”s what I”m saying. If they subtract the sales and other charges from the total, gross distribution, then they should issue you a 1099-R for the gross amount … in this case $28,000.
Now, one thing you haven”t explained clearly is the “other fees.” Some fees charged by the custodian are expenses of running the IRA account, and they shouldn”t show up anywhere. For example, if you are paying management fees for managing the account, usually 1% of the account value per year, this is not a distribution event.
Jim2008-02-27 13:08, By: Jim, IP: [126.96.36.199]
L2: 72t distribution, load,redemption fees effect
I do believe that the amount to be distributed must be the calculated distribution after any surrender charges, transfer charges, etc. If the plan calls for $50k then the net needs to be $50k the – thegross makes no difference.2008-02-27 13:13, By: Gfw, IP: [188.8.131.52]
L2: 72t distribution, load,redemption fees effectAs I understand the situation, Mike has mutual fund investments that are subject to back-end sales charges which would either be “B” or “C” shares. The “other fees” is hard to tell from the information given and he will just have to clarify this with the IRA custodian.
When I have had clients liquidate this type fund during the surrender period, the amount reported as a distribution is the gross amount. For example, $10,000 gross is distributed and $500 is withheld (assume a 5% sales charge) as the sales charge. The 1099 will reflect $10,000 as the distribution amount, not $9,500. This is the basis of my explanation.
Jim2008-02-27 13:28, By: Jim, IP: [184.108.40.206]
L2: 72t distribution, load,redemption fees effectJim,
I do understand the management fees will have no effect. It”s only the fees incurred or deducted when they distribute monies from various funds in my plan if transaction or/and redemption fees are applicable.Also somehow I was under impression (wrongly) that by trading within SEPP plan would cause distribution to be affected, but this would only cause my total account balance to go down incured by thosetransaction or redemption fees. Still I will call Fidelity and ask. Thanks,
Mike2008-02-27 13:32, By: keilwerth, IP: [220.127.116.11]
L2: 72t distribution, load,redemption fees effect
Jim – your post was right onjand I agree as long as the $10k is the taxable amount – thanks for the clarrification.2008-02-27 13:36, By: Gfw, IP: [18.104.22.168]
L2: 72t distribution, load,redemption fees effectMaybe I”m crazy, but I do not think that the fees for whatever reason have any bearing on the distributions. I think $ 28,000 of distributions is exactly that, no more, no less. If there are management fees, transaction fees, redemption fees, or any other fees, they should come out of the cash or principal within the SEPP 72-T IRA ACCOUNT itself. It is immaterial if you have to sell something to generate the cash to make the distribution. You distribute the CASH, and how you got it doesn”t matter. They must not reduce the DISTRIBUTION AMOUNT. I do not agree that there is a “net amount” which is different from a GROSS AMOUNT, except for federal (and possibly state) income taxes withheld, and remitted separately to the taxing authorities.2008-02-27 13:43, By: dlzallestaxes, IP: [22.214.171.124]
L2: 72t distribution, load,redemption fees effectI talked w/Fidelity retirement rep and she indicated that if I had funds with short term redemption fees which I do,and if monies were distributed from these funds, then indeed my distribution amount would be less. Also she said that this would reflect on my year end 1099R, which would not be the amount I originally calculated, thus raising red flags and causing me problems. She did give me advice, the simplest being to put enough in money market/cash reserve fund and have 100% taken from this to cover 1st yrs distribution, then by next yr resubmit to have moniestaken out of all my funds proportionally as I originally wanted. I”d like to hear from anyone else who has an account with Fidelity or for that matter any other firm that is in this same situation. As I said this is easiest solution, there are others, but I”ll go this route. Thanks,
Mike2008-02-28 13:17, By: keilwerth, IP: [126.96.36.199]
L2: 72t distribution, load,redemption fees effectFor your own piece of mind and sanity, FORGET ABOUT WHAT THE INVESTMENTS EARN, REDEMPTION FEES, LIQUIDATION FEES , OR WHATEVER. None of these matter. It doesn”t matter whether the distributions come from Interest, Dividends, Capital Gains, Cash in Money Market Accounts, or from selling securities. ALL THAT MATTERS IS THAT THE DISTRIBUTION MUST BE EXACTLY THE ANNUAL DISTRIBUTION CALCULATED. You are not distributing the INCOME, you are distributing a required calculated amount. PERIOD.
You apparently have told Fidelity to distribute the income as your distribution. WRONG. That is why she said you would get varying figures each year. If she doesn”t understand how a SEPP 72-T works, ask for their specialist, or move your accounts to a firm who does understand.2008-02-28 18:59, By: dlzallestaxesd, IP: [188.8.131.52]
L2: 72t distribution, load,redemption fees effectThe secret to this process is to have a little more than enough in cash account when each distribution needs to be made. The complication is that you are asking them to do “just in time” salesequally split in thesefundsfor only $14,000 each time, and that is why they are warning you that after their trading fees, etc., that may apply, it may not put enough in your cashaccount to cover the needed $14K gross distribution. Why not tell them to sell $15,000 each time, and that will keep a cushion (that will go up over time) in your cash/money market account to cover fees. On another note, any trading expenses or other fees that are removed from your account by the custodian will not show up on your 1099-R at the end of the year. Final note, as DLZ has said, you better get exactly $28,000 (before tax withholdings) each year (and a 1099-R to match that figure) or the plan is “busted” and penalties apply. Your distribution amount has nothing to do with your investment style. Youneed to distribute exactly $28,000 (gross) even in a year when your whole portfolio loses money! KEN2008-02-28 20:26, By: Ken, IP: [184.108.40.206]
L2: 72t distribution, load,redemption fees effectMike:
Is your IRA account with Fidelity on a Brokerage Account platform? I believe the answer is “yes” because from what I can determine, when Fidelity has an account direct with the investor and not through a financial advisor, then they put you into a brokerage platform. If so, then this will work OK in your situation. Let me explain.
The brokerage platform is like a box into which you put things, like mutual funds, stocks, bonds, etc. Within the box you can buy, sell and exchange investments, and there is no reporting to the IRS. So what Fidelity is telling you is to set up whatever systematic redemption plan you need to adequately fund the money market account within the brokerage account.You may need to increase the redemption rate to cover the back-end sales charges and other fees, but that”s OK. Still no reporting. Now here”s where the distribution action occurs.
Each month, quarter or whatever you desire for SEPP Plan distributions, Fidelity will distribute the correct amount from the money market account within the brokerage account. These distributions must total the exact amount of your computed annual distribution, which I believe you stated is $28,000.
Hope this helps.
Jim2008-02-29 08:47, By: Jim, IP: [220.127.116.11]