AMORT METHOD RECALC

L1: AMORT METHOD RECALCI set up a SEPP plan January, 2007 using the amortization method and assumingannual recalculation. I did not want/need to take the 120%, but also didn”t want to split my fund to accomplish a smaller payment, so I elected to use 2.5% (well within the rule of “not greater than 120%…). Now I”m recalculating using my 12/31/07 balance and updated actuarial info.Can I continue to use the 2.5% interest rate for the entire 5 years? Otherwise, I”m not sure how to define what my methodology is. Maybe 52% of mid-term rate?2008-01-07 19:36, By: kromehorse, IP: [216.205.217.129]
L2: AMORT METHOD RECALCVarious PLRs have approved annual recalculation and require updating all 3 variables each year. A true update of the interest rate should be related to the 120% midterm rate, therefore if your first year applied a rate of 52% of the then current rate for November, 2006, then use of 52% of the following November rate would be the most consistent methodology to follow in successive years. If you use a flat 2.5% each year, you are not recalculating that rate, you are using the same rate every year. I suggest making note on your original calcs that you used x% of a certain months rate after re checking what you did last year, and simply continue that approach for each successive year.2008-01-07 21:05, By: Alan S., IP: [24.116.165.60]

L2: AMORT METHOD RECALCAlthough my post here does not apply directly to Kromehorse”s question, I am wondering why people choose to recalculate their SEPP each year. It seems to me that this is just another opportunity for a SEPP-busting error to occur with almost nothing to be gained for taking this additional risk. Since we cannot know with any kind of certainty what the interest rates will be in the future, exactly what is gained by recalculating? Have I missed something here?
Ed_B2008-01-16 15:57, By: Ed_B, IP: [67.170.159.37]

L2: AMORT METHOD RECALCRecalculation should create no problem as long as the details were outlined prior to the plans implementation. You can”t decide later to add it.
In addition, you need to recalculate age, balance and interest rate each year on an established recalculation date.
Recalculation is generally adopted on the assumption that future distributions will always increase. In reality, future distributions may increase, but they may also decrease.2008-01-17 07:47, By: Gfw, IP: [74.136.102.241]

L2: AMORT METHOD RECALCIs there a good rationale to using a lower percentage withdrawal and tying up ALL of one”s principal? It”s very easy to split your 401K/IRA into different IRA”s and then apply only the SEPP to a principal amount for the desired cashflow. Then, your remaining principal funds are available for future uses if necessary. What is the benefit to committing all of the principal for a minimum of 5 years?2008-01-17 08:14, By: 1oldguitarman, IP: [209.64.87.68]

L2: AMORT METHOD RECALCShort answer… No.
It is like having the option to purchase something for $10, but to get the same thing you decide to pay $20 and get $10 back at the end of the plan.
In addition,to tying up the total IRA, you also lose use of those funds for emergencies, etc. and potentially risk busting the plan is additional funds are needed.
2008-01-17 08:34, By: Gfw, IP: [74.136.102.241]

L2: AMORT METHOD RECALCI agree that for financial reasons there is no consistently, good reason for not splitting assets into SEPP and Non-SEPP IRA”s. However, there may be non-financial reasons for maintaining one large SEPP IRA and using some percentage less than the 120% FMR. Case in point is the following sentence from “beatnik,” another poster …
“But first, thanks for the idea of splitting the IRA but for personal reasons I prefer not to discuss (I”m married, let”s put it that way), I cannot split the IRA.”
We can only comment as to financial or tax reasons to structure SEPP Plans a certain way. Individual, personal situations may dictate an entirely different course of action that is counter to the cut and dried aspects of 72(t) & (q) discussed here.
Jim2008-01-17 08:55, By: Jim, IP: [24.252.195.14]

L2: AMORT METHOD RECALCSorry, but I also really can”t seenon-financial logic to not splitting.
Nothing changes except that instead of one account there are now two accounts- the owner willbe the same, the beneficiary can be the same, the IRA Custodian can be the same and even the investments can be the same. 2008-01-17 09:02, By: Gfw, IP: [74.136.102.241]

L2: AMORT METHOD RECALCGood morning Gordon:
As to your statement …
“Nothing changes except that instead of one account there are now two accounts- the owner willbe the same, the beneficiary can be the same, the IRA Custodian can be the same and even the investments can be the same.”
… I would classify it as “financial reasoning” and that there is no “financial difference” between one large IRA and two IRA”s that have equal value. However, I must support the concept of “non-financial reasons” that also enter into decisions for structuring SEPP Plans, or any other type of investment plan.
Take for example intervivos trusts, aka, “living trusts.” Generally this type of trust is set up for financial reasons when putting together anestate plan for wealthy individuals. However, there are also non-financial reasons for setting up a trust. Financially it makes no sense but for other reasons it makes perfect sense. I can point to two cases in my practice where having the trust saved countless legal fees and long delays in solving particular problems for my clients and their families. Non-financial reasons are real and they definitely impact financial decisions.
So Gordon, I guess this is one point we will just have to agree to disagree.
Jim2008-01-17 09:28, By: Jim, IP: [24.252.195.14]

L2: AMORT METHOD RECALCTrusts are a whole other issue and slightly off the topic.
While we can agree to disagree, can you identify a non-financial reason for not-splitting an IRA into 2 parts using one as a SEPP and the other as non-SEPP. I can”t.
2008-01-17 09:41, By: Gfw, IP: [74.136.102.241]

L2: AMORT METHOD RECALCAlthough I agree with the financial rationale of splitting the IRA, consider the situation where someone has a large IRA and has family members, such as children thathave spending issues and constantly badger theIRA owner to bail them out. I”ve seen clients do this over and over again and pay penalties, etc. for early withdraws. If the IRA owner wants to impose more control over himself for having an open checkbook, perhaps the cost of busting aSEPP would be more of a deterrent. Then hecan legitimately say “sorry, the funds are all tied up in a SEPP and I can”t take a dime more”.
If the IRA owner is fairly certain that the income he”s receiving from the SEPP is adequate and has other resources such as employment income or non-qualified assets, he may have other reasons for tying up the whole IRA – whether they make sense to any of us or not.
I have a client that split her IRA to start a SEPP. She started a relationship with a man many years younger than herself and in order to impress him – I guess, she started buying him “toys” she couldn”t afford to buy. Little by little, the “emergency” IRA dwindled to nothing. Now, I can”t say that if she didn”t have the other IRA that she wouldn”t have busted the SEPP to get the additional $ but tying up the whole IRA could be someone”s self-imposed budgeting mechanism. Who knows – I”m just trying to come up with an example.2008-01-17 10:07, By: Carol, IP: [74.93.198.9]

L2: AMORT METHOD RECALC
I”m surprised that my original post has generated so much discussion. In my case, I have three other brokerage accounts that I “self-manage” and creating another with the related balancing and diversification work is more than I want to do. The reason I want to recalculate each year is not that I expect it to increase, rather I want my distributions to remain aligned and realistic relative to the size of the account. I lived thru the tech crash in 2000, thefinancial aftermath of 9-11,as well as other personal financial setbacks and always consider the possibility that I could wake up one day to an account half the size that it is today. I have friends who (back in the boom days of the 90”s) took large distributions that ultimately broke their 72t”s.
Besides that, It really doesn”t matter what happens, I can do OK for the next five years. If I didn”t believe that, I would give up golf and get a job.
I would say though, relative to the discussion you all are having, taking a larger distribution of a smaller account creates more volatility and not less.
kromehorse

2008-01-17 10:07, By: kromehorse, IP: [216.205.217.129]

L2: AMORT METHOD RECALCUnder some circumstances we advise clients to set up a separate IRA for each beneficiary, and tailor the investments according to their ages and needs. But, then we have to counsel the client to be careful to re-examine the accumulated balance each year to make sure they are equitablr based upon his comfort level, and to “re-balance” if necessary by transferring funds between the various IRAs, unless he wanted each IRA to grow based upon its own investments. Similarly, when he starts to take distributions, he has to determine whether to take them equally from each IRA, or take more from one(s) that grew more than others, etc. Finally, he might adjust his distributions based upon other assets being left to one or more of the beneficiaries (such as a family business). BUT, the recent change by VANGUARD to require all IRA accounts to have the same beneficiary causes a problem with this aspect.
Similar reasoning would apply to SEPP 72-T IRA accounts vs. non-SEPP accounts.
However, “marital status concerns” would not normally affect the decision about “splitting” accounts.
2008-01-17 13:02, By: dlzallestaxes, IP: [151.197.40.253]