Account balances to use
L1: Account balances to useIs there any specific account balance date that must be used in order to calculate a 72(t) or 72(q). It seems to be open for interpretation although logic would dictate if using the RMD method to use the 12/31 balance.I am contemplating using the prior months balance. Any thoughts?2010-09-01 15:27, By: Maverick, IP: [184.108.40.206]
L2: Account balances to useThe first thought is that if you are starting a new plan, DON’T use the RMD method. Keep this method available as a drop-back strategy if you find that you need to reduce distributions once the plan is running.
The general wisdom is to figure out how much money you will need on an annual basis then use the Reverse Calculator to determine how much you need to fund your SEPP Plan account with. Then if you have too much in the current account, set up a second, Non-SEPP Plan account to hold the excess funds for emergencies or a secondSEPP Plan if needed and transfer the excess into the new account before starting distributions. Use the most favorable interest rate from the “120% Mid-term Rate” table based on the month you plan to take your first distribution which will be your plan start date.
This will allow you to take the maximum SEPP Plan distribution while keeping the emergency fund for unexpected, “penalty” distributions so you don’t bust the SEPP Plan.
PS: Use the Amortization method for the greatest distribution amount. For the interest rate select the most favorable rate from either of the two months preceeding the month of distribution.2010-09-01 16:02, By: Jim, IP: [220.127.116.11]
L3: Account balances to useThank you. I appreciate your help.2010-09-01 17:16, By: Maverick, IP: [18.104.22.168]
L4: Account balances to useJim is correct. Avoid the MD (RMD) method.
But in the interest of an answer to your question, the att’d portion from 2002-62 clearly indicates that you would NOT be bound to a 12/31 account balance in the first year of your plan:
(d) Account balance. The account balance that is used to determine payments must be determined in a reasonable manner based on the facts and circumstances. For example, for an IRA with daily valuations that made its first distribution on July 15, 2003, it would be reasonable to determine the yearly account balance when using the required minimum distribution method based on the value of the IRA from December 31, 2002 to July 15, 2003. For subsequent years, under the required minimum distribution method, it would be reasonable to use the value either on the December 31 of the prior year or on a date within a reasonable period before that year’s distribution. >>>>>>>>>>>>>
But remember that the account value must also be a “reasonable” amount in relation to the current value. Market fluctuations of under 20% are probably OK to ignore, but if the account value were to drop more than 20% when you start your plan, I would not tempt fate bylooking backward for a date with a value higher than this arbitrary limit. The 20% limit is just my reasonable guess, it has never been specifically addressed to my knowledge.
The same is true of one of the fixed dollar methods. I would not look to find a former value that is MUCH higher than the current value, or it might be deemed an unreasonable balance amount.2010-09-01 21:46, By: Alan S., IP: [22.214.171.124]
L5: Account balances to useWhen you consider the term “reasonable amount” in setting up your SEPP Plan, you must consider it from two angles. Alan has addressed the “reasonable amount” aspect from the viewpoint of what the IRS is likely to accept. I will address the term from the standpoint of survival of your plan over the long term. Keep in mind that the interest rate used in the calculation (2.83% currently) has nothing to do with the actual percentage of the account that is distributed.
Assumean account that at one time was worth $1M but has suffered a 20%and 40% decline so the other balances are $800K and $600K respectfully. If you withdraw the calculated annual amount, then in this examplethe actual percentage of the account balance withdrawn will be 5% in all cases. However, if you withdraw $46,019 each year, which is the calculated amount for an account balance of $1M, then the actual percentages withdrawn willbe as follows: $800K = 6% and $600K = 8%.
Given that most planners recommend an actual withdrawal rate of between 4% and 5%, by basing your distribution calculations on anaccount balancefar greater than the actual, current account balance, you jeopardise the sustainability of your plan over the long run.
Remember that you MUST use either of the two previous months’ published 120% Mid-term Rate and NOT an actualdistribution percentage like my example shows to calculate an accurate SEPP Plan distribution amount. We’ve had too many people post that their advisor had said 10% was a “reasonable rate” when the legal rate was significantly lower. Needless to say we had to break the bad news that their plan was busted on day one.
Jim2010-09-02 14:32, By: Jim, IP: [126.96.36.199]
L6: Account balances to useAnother point often missed or confused is that there does not have to be any relationship between the amount withdrawn or theamount of incomethe account is earning, vs. the rate used in the initial calculation and the rate actually being earned in the SEPP 72-T account(s).
If the amount withdrawn exceeds the amount earned, it only means that you are distributing some of your principal. As long as the excess is not ‘excessive”, it just means that your retirement portfolio won’t last as long as you thought, and in extreme cases you might use up all of it. But usually you have no alternative.
I have many clients who are under the mistaken impression that they had to reach for the highest yield, because they “did not want to touch principal”. They did not understand that “growth appreciation” is a viable source from which to take distributions in excess of cash income from interest and/or dividends.2010-09-02 18:17, By: dlzallestaxes, IP: [188.8.131.52]
L7: Account balances to useDlzallestaxes, I have noticed a lot of people treat IRA withdrawals as though the money vanishes into thin air. While it certainly is advantageous to keep the largest amount of money tax-deferred for as long as possible, the money you withdraw, minus taxes, can still be invested if you don’t need it for day-to-day expenses.
I am about to take my third SEPP. I need to take five. I decided to use the minimum-distribution method because I felt I had enough cash outside my SEPP IRA (but not enough to last to 59.5), wanted to minimize my distributions, and didn’t want the hassle of the one-time switch to the RMD method if the stock market cratered. So far, I’m satisfied with my plan. I will be 59.5 a month before the last SEPP and have another IRA.
I really like the simplicity of a once-yearly SEPP. I call Vanguard. I get the name of the rep. I give him or her the amount. I ask the rep to repeat the amount. It’s done.2010-09-12 06:02, By: Eureka, IP: [184.108.40.206]