Account value when starting SEPP
L1: Account value when starting SEPPI want to start a new SEPP midyear and will be using the 5 year rule. It is my understanding that the valuation on which SEPP distributions are based may be any reasonable valuation between December 31 of the preceding year up to the month preceeding the distribution. For some reason, I have taken this to mean end of year or end of month valuation. I have multiple IRAs and wanted to begin distributions in June. For this purpose, I was going to combine all accounts into one and use the end of month valuation. I was unable to do this prior to the end of May. My brokerage rep suggested I create a totally new IRA and transfer all assets to the new IRA and use the opening balance of the new IRA to calculate the distributions. I would like to know if this approach is advisable or is this a method of valuation the IRS would frown upon.
Thanks2014-06-01 22:54, By: pigtail, IP: [220.127.116.11]
L2: Account value when starting SEPPAm not sure whether you want to transfer all your IRA assets in a single account before starting the plan or whether you just want to start a plan that includes different IRA accounts in the plan. You can do either. If you are actually combining IRA accounts, do so by direct transfer instead of 60 day rollovers, and use the balance of the combined IRA after the transfers are all completed and before the date of the first distribution. You do not need to use a month end balance, but it may be easier because you would just download the monthly statement to document your plan. Using another date will be a little more work to document the balance on that date depending on what your custodian offers. Also, unless your total balance is far short of what you need to generate the annual distribution you need, you may want to leave one of the IRA accounts outside your SEPP plan for emergency needs. You could set up the SEPP balance and the other IRA balance with relative balances that will work for you. What your brokerage rep suggested would not be a problem, but you can use any of your current IRA accounts to receive the transfers and do not need to open a new one. Remember that if you use more than one account in your plan, the account balance date must be the same for each account and there can be no distributions between the date of that balance and your first SEPP distribution.2014-06-02 00:08, By: Alan S, IP: [18.104.22.168]
L3: Account value when starting SEPPThanks Alan,
Just to clarify. I am not setting up multiple SEPP plans using multiple accounts. In addition, I am not using the valuations from multiple accounts to create one SEPP plan. I have multiple accounts all with the same custodian so there is not need for a rollover. I want to set up one SEPP plan from one account. To do so I have two choices.
1) Transfer assets from all accounts into one of the pre-existing accounts and use the valuation of this single account to create the plan.
2) Transfer all assets from all accounts to a brand new account with the same custodian and use that account value to create the plan.
Once I have done either of these options I can wait until the end of June to document the end of month value and use that for the plan or I can use the value of the single account on the day it is created as the basis for the SEPP calculations. Which option do you think is better and how should I document the balance of the account if I do not want to wait for end of month valuation? One thought would be to use the end of the trading day (4 PM EST) to value the account and print the valuation from the custodians website as documentation.
What do you think.
Thanks2014-06-02 02:56, By: Pigtail, IP: [22.214.171.124]
L4: Account value when starting SEPPYou are correct, youcould use either option for the valuation date as long as you make a copy of your statement or on lineprintout of the value as of the end of any day you choose. Other than that, if there is a major change in your total value between the date you combine the accounts and 6/30, you would be better off usinga date with the highest value if you want your distribution to be as large as possible. Likewise, you could transfer all assets to a new account or to one of the original accounts, whichever you prefer.
You are correct that you will have a 5 year plan if your first distribution is after the date you reach 54.5. Technically, the 5 year rule is an unrelatedoption for RMDs after the death of the plan owner prior to RBD, and has nothing to do with a 72t plan.
2014-06-02 04:54, By: Alan S, IP: [126.96.36.199]
L5: Account value when starting SEPPThank you Alan. Your responses have been most helpful.
However, I am still unclear of the amount of the annual distributions. Maybe you or someone else can help.
For arguments sake, lets say I began distributions on June 10, 2014 with a first modification date of June 11, 2019.
It is my understanding that when reporting annual distrubutions on form 5329 they must be equal from one year to the next. If one chooses to prorate the distributions, however, and take 7/12s the first year and 5/12s the last year the annual distributions would not be equal. Is this acceptable to the IRS or would it be better to take 5 equal annual distributions starting this year and not take a distribution in the last year (2019)?
Thanks2014-06-02 13:10, By: pigtail, IP: [188.8.131.52]
L2: Account value when starting SEPPI suggest that you get a new broker who understands SEPP 72-T procedures.
1. You are correct that you could use 12/31/2013, or any month-end balance thru 5/31/2014.
2. If you had a higher balance at the end of any day during any of the past 5 months, you could use that, provided you have, or can get, a printout of the balances of all of your IRA accounts as of that same date.
3. You can only use the 5 year rule if you are not yet 54 1/2 ( i.e. born after 11/30/1959). If you were born before 11/30/1959, you will have to wait until you become 59 1/2, if that will be > 5 years after your first distribution.
4. If you have a 401-K or 403-B, and will be 55 or older by 12/31/2014, and will be retiring or terminated in 2014, i.e. “separated from service”, then do not transfer those balance to an IRA because you can access those balances now if your employer’s plan permits it.
5. You do not have to combine all of your IRAs into one account. If you presently have multiple accounts at the same or different brokers, YOU CAN COMBINE THEM FOR CALCULATION PURPOSES INTO YOUR “SEPP UNIVERSE”, without physically combining them into a single account.
6. We usually recommend that you do NOT put all of your IRAs into your SEPP Universe, but rather that you keep some portion of it in a separate IRA account in case you need more money in an emergency in the future. If everything is in a single SEPP account and you need more money at any time within the next 5 years, then that will “bust” you plan, and as a result you will be subject to a 10% penalty ON ALL OF YOUR DISTRIBUTIONS CUMULATIVELY SINCE YOU STARTED. That can be very expensive, especially if it happens near the end of the last year of your plan.
7. Since your broker has not explained all of this to you, I refer you back to my opening sentence. Also, you should reference related postings in this website to familiarize yourself with the above provisions for SEPP 72-T plans.
8. If you give us the monthly amount that you want, your date of birth and the balances in each of your IRA accounts at 12/31/2013, 5/31/2014, and whatever the highest TOTAL was at any month end (or other date), we might be able to give you some indication of the highest amount that you could get annually.
9. For 2014, you are allowed to take EITHER the full ANNUAL calculated amount, or 7/12ths of it ( for June thru Dec of 2014). Taking a full 12 months worth now could be a good buffer for future years if you set the extra 5 months aside in an “emergency” non-IRA money market account.
10. If you have a problem understanding all of this, I suggest that you hire an experienced financial advisor or tax accountant who does understand how to PLAN a SEPP 72-T before you start.
2014-06-02 00:12, By: dlzallestaxes, IP: [184.108.40.206]
L3: Account value when starting SEPPThanks for your response. I am not clear on a couple of your points.
I am not sure why you think my broker and I have not discussed each of the points you make.
In addition, I am not sure why you say I can onlyuse the 5 year rule if I am younger than 541/2. It is my understanding that the plan must remain in force for 5 years (60 months) or until you reach age 591/2 whichever is longer. Therefore, it would seem the opposite (ie I can not use the 5 year rule if I am younger than 541/2). Please clarify. Maby I do not understand the 5 year rule.
Lastly, it is my understanding that if the plan is to remain in force for 60 months and 5 annual distributions are taken (corresponding to a calendar year) than each of the distributions must be equal. Therefore, if one prorates the annual distribution because the plan is starting in the middle of the year then 3 of the annual distributions would be egual and the first and last annual distributions would not.
Thanks2014-06-02 03:18, By: pigtail, IP: [220.127.116.11]
L4: Account value when starting SEPPSorry. I revised the wording of my #3, and forgot to change all of the wording correctly. Yes, you must keep the plan for the later of age 59 1/2 or 5 years. So, if you were born after 11/30/1959, then you are younger than 54 1/2, and will have to keep the plan for more than 5 years until you are 59 1/2. If you were born before 11/30/1959, then you are already 54 1/2, and will only have to keep your plan for 5 years, which will be after you are 59 1/2.
Yes, you must take the equivalent of 5 annual distributions over the life of a 5-year plan, but you are allowed to prorate the first year and last year. So, you can take 7/12 in 2014, full annual distributions in 2015-2018, and then 5/12 in 2019. Or you can take full annual distributions in 2014-2018. Then, in 2019 you could take -0-, 5/12, or full before 5/31/2019, and anything that you want after 5/31/2019 when your plan ends. ( The actual final date will really be 60 months + 1 day after your first distribution in 2014.) Many people make the mistake that the 5-year plan means taking distributions in 5 different calendar years, and sometimes they take the full annual distributions at the beginning of each “fiscal year”, and then think that they are done when they take the 5th annual distribution just after the end of the 48th month. The plan does not end until after the 60th month from the first distribution.
You can take your distributions at any frequency that you want in any year, and can change year to year based upon your needs each year.
I said that I thought that your broker had not explained all of these items with you because you said his only advice was to combine all of the IRA accounts into one account. If you do that, then you can only use the combined balance in the new/ultimate account as your starting balance, and cannot use any higher total of account balances of all of your iras that may have occurred on 12/31/2013 or at any time since.
If you have iRA accounts at more than 1 broker, then he could be advising you to combine those other accounts into the one at his firm in order to “pad” his total of AUM (“Accounts Under Management”), which is a key measurement of broker productivity.
Also, you did not seem to understand that you have flexibility of how much you can take in 2014, how the 5 year term is determined, etc.
Did you discuss with him, or your tax accountant, the tax aspects of your 2014 tax bracket and any tax related planning as to how much you should take in 2014 which could be taxed at 15% rather than 25% or more ?
Did he discuss with you the idea that Alan and I mentioned about setting aside something into a separate IRA for future emergencies ?
Did he suggest that you consider setting up more than one SEPP 72-T plan, with one of the plans being prorated, and the other taking the full annual distribution in 2014 whenever you start it, even if not until November or December ?
If you are 57 or older, have you considered not setting up a SEPP 72-T so that you will not have to wait 5 years, and can access your entire IRA balance at 59 1/2, instead of being locked in for 5 years ? Or will you then be ok until becoming eligible for Social Security, but only if you will not be subject to the SS earning limits before their penalties start.
If you have discussed most of these topics, then he did a good job, and so did you. If not, then consider doing more planning.2014-06-02 15:05, By: dlzallestaxes, IP: [18.104.22.168]
L5: Account value when starting SEPPThanks so much dlz and Alan for your extensive responses.
To be honest much of what I know about SEPP planing I have learned form reading IRS documents primarily Rev. Rul. 2002-62 and this and other websites.
I am trying to follow the KISS principal with regard to this SEPP plan in an attempt to avoid any costly mistakes.
Unfortunatly, I have been affected by the economy, job prospects and unplanned early retirement.
Most of the information you have provided I already knew from my reading. I try to educate myself since this would not be the first time I have received bad information from so called professionals.
I am intrigued by not having to follow the 5 year plan if I start the SEPP after age 57. I did not know this option existed. I am inclined not to pursue this option, however, since being locked into a distribution amount will provide some discipline with regard to cutting expenses. Would you provide more information on this option as you have peaked my interest.
Best Regards2014-06-02 16:09, By: pigtail, IP: [22.214.171.124]
L6: Account value when starting SEPP>>I am intrigued by not having to follow the 5 year plan if I start the SEPP after age 57.
I believe that what Dlz was talking about was NOT setting up a SEPP and doing direct withdrawals from – if needed (and subject to penalty prior to age 59.5) – and using other available assets until age 59.5.
2014-06-02 16:27, By: Gfw, IP: [126.96.36.199]
L7: Account value when starting SEPPExactly.
If you have low income, then your taxes may be very low, and even the 10% penalty might keep your taxes manageable.
You should look at your projected taxable income, etc. for 2014, and then 2015, etc.
In many cases, it is better to pay the extra 10% of a low taxable income if it gives you greater flexibility than being locked in for 5 years, when you will have complete flexibility when you reach 59 1/2 to take out whatever you need without any penalty.2014-06-02 16:37, By: dlzallestaxes, IP: [188.8.131.52]