72t distributions calculation

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L1: 72t distributions calculationI am considering taking 72t distributions from my IRA due to extended unemployment. I am figuring out how much to take out of $1M total retirement portfolio, at age 57, balancing enough to live on now and enough to last until I am 95. Can someone make a suggestion about the assumptions to insert in the calculator to come up with this.What should I set forIRS penalty (didn’t think there was one?), interest rates (is that a rate for my whole account?), or choice of amortization/annuitization.(Seems calculatoronly gives me a lifetime until 85 however! Is there a way to change this assumption)Thanks so much. This is great site.2009-12-28 07:32, By: marceya1, IP: []
L2: 72t distributions calculationYou are really asking two different and unrelated questions. The calculators on this website are designed for planning a SEPP, not for planning retirement – they are two totally different items.All calculations for SEPP plans involve life expectancy as defined by mortality tables, not anarbitrary age that you select.Start by reading our FAQ and becoming familiar with what a SEPP actual is and what the IRS requirements are to establish a SEPP. Thenconsideralternatives other than a SEPP plan. At age 57, you will be locked into the SEPP for a minimum of 5 years. The amounts to be distributed by the SEPP are somewhat pre-determined by the 3 allowable methods that can beused to calculate the initial distributionfrom a SEPP.You could sub-divide the account or use a lower interest rate than the maximum 120% rate, but that’s about all the flexibility that you will have.2009-12-28 12:08, By: Gfw, IP: []

L3: 72t distributions calculationGFW really appreciate your response and yes before my post I read all other questions/answers. I was trying to come up with an amount to take for 5 year SEPP distributionthat is prudent in light of my life expectancy. Then will somehow make up the rest needed to live within my budget. I was using 72t calculator to see what amounts would come up based on various methods. Looks like there is some variation, so not sure which one to choose?How does account make that required interest rate when those rates are not currently available in the market place?2009-12-28 22:34, By: marceya1, IP: []

L4: 72t distributions calculationStart by estimating the annual amount thatyu will needfor the next 5 years and then use the reverse calculator to determine how much of the total to allocate to the SEPP plan. Use the maximum interest rate and use the amortization method – it produces the highest distribution for the lowest number of dollars allocated.Whetheror not you can earnthe interest rate is immaterial – the calculationis based on your life expectancy, not 5 years. If you really choose to use a lower rate, it can go all the way to zero, but that wouldn’t be my choice. And remember… if the plan runs out of funds, there is no penalty.2009-12-28 22:54, By: Gfw, IP: []

L5: 72t distributions calculationThat is getting closer to what I am trying to figure out.Not sure what interest rate to put in tho, since I don’t know where interest comes from? Or is it hypothetical to the calculation.Used 4.2%, 40K annually x 5 yrs (200K total), age 56, 700000 IRA, left ending balance of 552K (which used only 148K from IRA, due to interest replenishing account I guess).Appreciate this educational site and help very much.2009-12-29 00:31, By: marceya1, IP: []

L6: 72t distributions calculationYou need to put in some tiime learning what a SEPP plan is. The max rate for Jan or Feb 2010 is 3.16%, not 4.2%2009-12-29 00:58, By: Gfw, IP: []

L7: 72t interest calculationThat is what I am doing on this site Thought your prior post said pick a HI interest rate. Problem is I do not understand what is the purpose of selecting any interest rate since that is not what the portfolio will really earn. Is is hypothetical? For what purpose? Thanks much.2009-12-31 06:09, By: marceya1, IP: []

L8: 72t interest calculationWhat your portfolio earns makes no difference and has no bearing on the interest rate that is used for SEPP calculations. You can use zero percent or you can use any rate up to the maximum 120% mid-termrate as published by the Treasury – that is the range. The calculator defaults to the maximum rate if the initial distribution were to occur in the current month. Next month, the maximum rate will change – it may be higher or lower. 2009-12-31 14:03, By: Gfw, IP: []

L2: 72t distributions calculationThe “Reasonable Interest Rate” value in the calculator on this site is the one that cannot exceed the 120% Fed Midterm rate that is applicable for the period when you make the first withdrawal.To simplify, If you start your withdrawals in MARCH 2010, you cannot exceed the higher of the JAN or FEB 2010 rates (or the rate announced for the two prior months if you choose a different initial payment month). The “actual interest rate” is only used to predict how much money may be left over a period of time after making those withdrawals by adding interest earned. The link to the INTEREST RATES on this site has a heading that explains how the rates can be applied. Make sure you use the POSTED FED rate as your MAX, using the above rule. If you are not starting for a few months or more, you can only guess at the rate for now, and you may find that the rate is lower or higher by then, when you would recalculate before supplying the actual results to your custodian to start the SEPP.The projected or predicted interest rate in that chart under interest rate isGordon’s estimate as to what the ratemight be, and that is posted prior to the actual FED rate being announced. Do not use that one. This all applies to either AMORTIZATIONor ANNUITIZATION methods, since the RMD method under SEPP involves only your balance and the age you will attain in the year youare taking the withdrawals, and is recalculated each calendar year. The calculator will give you all three results, but you can see if you change the “reasonable Interest Rate” to zero, it will still yield the same RMD result. I hope this helps, but you will need to gather more info about 72t (SEPP) plans before you do your plan. KEN2009-12-31 15:29, By: Ken, IP: []

L3: 72t distributions calculationKenAppreciate and understand your explanation of what to use and how to make the variousalternative calculations. The institution will likely do the fomulation for me. But what purpose is served by usingthis pre-determinedinterest rate to show how much interest the account will earn when it is not actual interest over 5 years in the account. That is what is baffling me. Thanks.2010-01-02 06:31, By: marceya1, IP: []

L4: 72t distributions calculation>>But what purpose is served by usingthis pre-determinedinterest rateThe IRS sets the maximum rate that can be used. Anything less is OK. Why? You can only get that answer from the IRS as they set the maximum allowable rate in Rev.Rul 2002-62. The rate was set in part simply because most people used rates that were in excess of what they were earning and the SEPP plan went bust.2010-01-02 10:21, By: Gfw, IP: []

L4: 72t distributions calculationMarceya1,
The “predetermined” (max) interest rate you are referring to is the interest rate limit that the IRS allows you to use when computing your 72t withdrawal. It changes every month, so the choice of a figureis predicated on the month you are making first withdrawal (*see below). It does not have a real correlation to the amount of money you may earn while leaving your account invested.. that depends on the market and on your investment luck and savvy. When I started my plan in March 2006, I used the Jan 2006 Fed Mid Term rate which was in the 5+% range at the time. Over the next 3 years I have not come close to making 5% on my investments because of the last 2 yr meltdown, so don’t try to link that allowable maxrate (that IRS sets each month) for Amortization or Annuitization calculations to anything, othenthan knowing you cannot exceed that rate in your calcs, and you can only use the rate (or a lesser amount than that) *from one of the two posted months that precede your first actual withdrawal month. Also- Do not plan on your custodian making the calculations for you. They may provide a form to you with formulas on it, as Schwab did for my 1st 72t plan in 2006, and Vanguard did for my 2nd 72t plan in 2007, but they didnot offer to fill it out for me, and most do not want to even be involved (and therefore be responsible) for figuring out your annual payment, since any mistakes that lead to you being charged penalties by the IRS could come back on them in a lawsuit filed by you.IF they do offer to do your calcs, make sureyou redo the cals on this website and see what it yields and question any differences. I hope this helps. Ken2010-01-02 15:42, By: Ken, IP: []

L5: 72t distributions calculationThe short answer why no adjustment is made is that it would force everyone to adjust based on their investment results, when the general purpose for a SEPP is to provide needed income without the early withdrawal penalty. However, there is an intermediate “compromise” between fixing your distribution amount for several years vrs adjusting it each year based on your investment results. That compromise is to initiate a recalculation plan from the beginning. While this does not change your distribution amount retroactively, it DOES change the calculation each year to reflect current interest rates and your increased age by one year, along with your account balance which may be up or down far more than the amount you took out the previous year. I don’t recommend this for the average SEPP user because it requires a new calculation each year and increases the chance of making that one fatal error. It may also generate an IRS inquiry where you would need to justify your calculations for a number of years. The risk exceeds the reward here for most people, but there may be a few unique cases where the recalculation method might be used to achieve a specific purpose.And either way, you can still reduce your payout by the one time switch to the RMD method if you want to preserve IRA assets. This can result in a sizeable reduction perhaps around 60% if your account values do not change much from your initial balance.2010-01-02 18:43, By: Alan S., IP: []

L6: 72t distributions calculationAlanGood to know, although this gets more and more complex as I learn more. Don’t mean to make it any more complicated than needed. Will keep that one time adjustment in mind down the road in case I get a job. For now, guess I will use the amortization formula (no clue how/why that differs from annuitization really???) and interest rate from Jan. Thanks.2010-01-03 03:42, By: marceya1, IP: []

L5: 72t distributions calculationKenThat is starting to make sense. I understand one has to use that interest rate, just couldn’t really see what it really accomplishes. Appreciate word of caution re; my institution, tho I heard they will calculate based on amount I choose. Obviously wish to deplete as little principle as possible. Thanks.2010-01-03 03:44, By: marceya, IP: []