L1: August SEPP
I’ve followed your truly excellent site for many years and I’m finally about to embark on my SEPP. As supporting documentation, I will have the form below notarized, in case I need support for the IRS and as instruction to Vanguard. I thought I would run
it by the site for comments. I can’t attach it, so the formatting is a bit off. Of course the account, name and balance are bogus but calculations are correct. thks all.
SEPP DISTRIBUTION PLAN
The following information documents the basis for the establishment of Substantially Equal Periodic Payments for withdrawals from the identified 401k/IRA account without penalty in compliance
with Section 72(t)(2)(A)(iv) of the Internal Revenue Code, IRS Notice 89-25,and Rev. Rul. 2002-62.
Account(s): Vanguard 401k Accnt #123456
Account Owner’s Name: John Doe.
Account Owner’s Date of Birth:
First Distribution Month and Year:
Final Month and Year of SEPP Plan participation:
1) Calculation Method: Amortization Method
per Rev. Rul. 2002-62 Section 2(b)
2) Owner’s Age: 57
(as of 12/31 in the first year of distributions)
3) Life Expectancy: 27.9 years
per Single Life Expectancy Table- 1.401(a)(9)-9, Q&A-1 of the Income Tax Regulations
4) Interest Rate Used: 2.73 %
. In compliance with RR 2002-62, the rate is based on 120% of the Annual Federal Mid-Term AFR for June 2011 per REV. RUL. 2011-13 TABLE 1
5) Account: Balance: $1,000,000.00 on 06/30/2011
6) Calculated Annual Distribution Amount: $52,830
7) Planned Distribution Schedule:
Date Total Distr. 20% WTH Deposit
Aug-2011 $52,830 $10,566 $42,264
Jan-2012 $26,415$5,283 $21,132
Jul-2012 $26,415 $5,283 $21,132
Jan-2013 $26,415 $5,283$21,132
Jul-2013 $26,415 $5,283 $21,132
Jan-2014 $26,415 $5,283 $21,132
Jul-2014 $26,415 $5,283 $21,132
Jan-2015 $26,415 $5,283 $21,132
Jul-2015 $26,415 $5,283 $21,132
2011-07-13 18:31, By: bn542, IP: [188.8.131.52]
L2: August SEPP
Form looks OK, but the calculator for this site produces an annual of 51,673.
Other calculators sometimes factor in your distribution pattern which is immaterial, but that will produce a lower annual amount, so don’t know how you are coming up with a higher amount. What calculator did you use?
Suggest you run the #s on the SEPP calculator on this site:
2011-07-13 22:08, By: Alan S., IP: [184.108.40.206]
L3: August SEPP
I did use the calculator on this site. I must have had something out of place somewhere because you are correct.The numbers aren’t correct for the true SEPP balance either so I don’t know where the mistake was. Just goes to show that you need to be very
careful and triple check the numbers before commiting to them.
2011-07-13 23:32, By: bn542, IP: [220.127.116.11]
L4: August SEPP
Also, the SEPP will NOT end on 6/30/2016.It will not end until 5 years from the first distribution which would be sometime in August, 2016.
In 2016 since you will have already taken 5 full years of distributions and will be over 59.5, I think you will have 3 options in 2016. Take nothing before the August date; take 7/12’s or take the full annual distribution.
Since it appears from your post that you will not be taking any SEPP distribution in 2016, and if that is the case, you will not be able to make any withdrawal until after that AUGUST, 2016date.
The main point is that your SEPP Plan does not end until sometime in August, 2016.
Also, I would not select the 1st of the Month for withdrawals if you will be making your semi-annual withdrawals in Jan/July because some brokerage firms may process a January payment in December since 1/1/xx is a holiday.
2011-07-14 00:22, By: meb24, IP: [18.104.22.168]
L5: August SEPP
Assuming the first payment is August 15, 2011 the “Final Month and Year of SEPP Plan participation” needs to be August 2016 and SEPP expiration is 8-14-2016 (I think I’ll remove that from the final
seeing as I cant predict when the actual deposit will occur and besides I dont think a SEPP really expires). Your warning about thefirst of the year is also a good reminder.
2011-07-14 00:58, By: bn542, IP: [22.214.171.124]
L6: August SEPP
This calculator generates your modification date, ie the first date that any distribution is no longer governed by your SEPP plan. Note that the DISTRIBUTION date starts the clock, not your received date. If you use the received
date you are actually getting another couple days of padding.
However, where the distribution date can bite you is on your starting month. If you order the distribution and it is made on the 31st but you receive it the next day, your plan started in the month of distribution. That affects
the highest interest rate month that you can use. Another reason to stay away from the last days of a month and/or the first days of the next month. Working between the 10th and 20th is best as there are fewer gray areas and still time to correct errors.
2011-07-14 03:05, By: Alan S., IP: [126.96.36.199]
L7: August SEPP
So if your plan is based on rates applicable to August and you take a full annual withdrawl and it doesn’t get distributed till Sept 1, your busted before you even get started.
2011-07-14 04:11, By: bn542, IP: [188.8.131.52]
L8: August SEPP
Maybe. Rates applicable to August may still be valid for a Sept distribution. A Sept distribution means that the June rate can no longer apply, but the July rate is still good.
If you are using a rate lower than the month no longer accessible, the plan would still be good.
If you intended to use the higher rate and decided to use the lower rate to save the plan and adjust your annual amount downward, we get into the debate where the line is drawn in time for reworking your initial calcs. We try
to avoid getting into those discussions here in favor of encouraging thorough research and checking before completing the initial doc sheet.
2011-07-14 04:44, By: Alan S., IP: [184.108.40.206]
L6: August SEPP
bn542, your comment …and besides I dont think a SEPP really expires
A SEPP plan ends at the later of age 59.5 or 5 years from the date of the 1st distribution (or because of death or disability).
The 5 year plan offers little flexibility in terms of stub years either in the first year or the final year. You need to distribute a total of 5 annual distributions during the 5 years. The plan will end 365 days times 5 years plus 2 days for good measure
(or use our calculator).
2011-07-14 10:23, By: Gfw, IP: [220.127.116.11]
L7: August SEPP
I do not know if you got the wording of your document from some place, or designed it yourself. But, I would not use the wording “401-K/IRA” for a specific account. It should one or the other, but not both or “either/or”.
If you were ” separated from service “, voluntarily or involuntarily, during 2011, I would check with the 401-K plan administrator to see if the plan allows partial periodic withdrawals. If so, then you probably do not want to roll it over into an IRA because
the 401-K plan approach would eliminate any restrictions for 5 yeras or age 59 1/2. This approach is allowed, and avoids the 10% penalty, the same as the SEPP 72-T. If the 401-K option is available, then do not roll over the 401-K into an IRA because that
will invalidate the 401-K option.
Also, if there is an “employer stock” in your 401-K plan, which is often done by companies in making their “matching contribution”, then ask the plan administrator for the “employer cost basis” for these shares, and research the special NUA tax provisions
on this site and/or in IRS publications. That could save you a significant amount in taxes. ( I have posted numerous explanations already on this site.)
Otherwise the other responses give you excellent suggestions.
2011-07-14 14:13, By: dlzallestaxes, IP: [18.104.22.168]
L8: August SEPP
Thanks all for your valuable input.
Alan, there is a significant rate drop between June and July so its advantageous to have things in place for a safe August distribution.
Gfw, the plan ends 5 years from the date of the 1st distribution but couldn’t I still take a full annual distribution in 2016 prior to August without penalty? As long as I dont take out any more than that?(fyi this is speculation, I dont really plan to)
dlzallestaxes, I think I made up that wording for the posibility that if I were to create a second SEPP from an IRA, the same “form” would apply. The account is specifically detailed in the following Account Information. I’m aware of the age 55 rule but
it doesn’t apply to my case but thank you.
Again, thanks all for your comments
2011-07-14 15:19, By: bn542, IP: [22.214.171.124]
L9: August SEPP
You may want to take a very close look at Arnold v. Commissioner, 111 TC no. 12
I’m not sure of your planed distribution schedule, but if you take the full annual distribution in 2011, and the full annual distribution from 2012 to 2015, no distribution should occur in 2016 until after the SEPP plan ends.
Here is a link to a summary of
Robert C. Arnold v. Commissioner, 111 TC no. 12.
2011-07-14 15:48, By: Gfw, IP: [126.96.36.199]
L10: August SEPP
Each SEPP 72-T PLAN must be unique. The accounts that make up the SEPP 72-T UNIVERSE must be specified, and documented with the applicable account balance(s) as of the applicable date.
You cannot have a “catch all” document to cover future events. Each plan must be documented separately, and specifically. You could not fund a futue SEPP 72-T from an IRA, and a current SEPP 72-T from a 401-K from the same account, or by using the same balances.
Your “shortcut” would make your plan busted to start with.
2011-07-14 16:24, By: dlzallestaxes, IP: [188.8.131.52]
L11: August SEPP
I agree with dlz that the form should be changed to reflect ONLY the accounts for the specific plan being documented.
While you certainly can establish your SEPP with a 401k plan, you have more control and less risk if you use a rollover IRA after doing a direct rollover out of the employer plan. I understand you may not have time to do that
now and still generate the first IRA distribution this month.
In the event you thought that the inclusive account listing would allow you to rollover the 401k into an IRA and maintain the same plan, it does not. The IRS considers a qualified employer plan a “different type” of retirement
account and a transfer to an IRA would bust the plan. You also cannot use a combined balance between an IRA and a 401k to calculate a SEPP plan even if you plan to only take distributions from one of them.
Your plan would not be busted just by showing the two types like you did as long as you did not actually link two such accounts in your plan calculations or do something later to combine them by rollover. But at this point you
should eliminate the “IRA” reference from the documentation if you are going to start the plan from a 401k.
I don’t know if you will get any actual support from Vanguard for your plan and you certainly will need a 5329 to report the SEPP exception. Further, the qualified plans division of Vanguard may not be familiar with SEPP plans
at all because using a 401k is fairly rare. Be sure that there are NO additional contributions to be added to this plan such as a late employer matching contribution. That would bust the plan.
A while back someone with a SEPP plan from a 401k ended up with an excess contribution situation because the plan failed testing for highly compensated employees. A distribution was required and a 1099R with special coding for
a corrective distribution. If this happened, it should NOT bust the plan as long as the corrective distribution was factored in to your annual distribution and the scheduled distributions reduced accordingly. The two 1099R forms would have to add up to the
correct annual amount and you would be OK. But this is an example of the “stuff” that can happen if you use a 401k plan for your SEPP.
2011-07-14 17:47, By: Alan S., IP: [184.108.40.206]
L12: August SEPP
Thanks all once again,
Arnold v. Commissioner, 111 TC no. 12 is pretty crystal clear, so meb24’s comment “I think you will have 3 options in 2016. Take nothing before the August date; take 7/12’s or take the full annual distribution” is NOT correct. Take nothing before August
is the only option.Like I said, my planned distribution schedule is laid out in the document (thats kinda the point).
I dont know what you mean by “shortcut”. I didnt mean to generate confusion, I guess by my choice of words “the same form would apply”. I did not mean that this same notarized form could be applied elsewhere,merelythat the generic header is applicable
for documenting any SEPP whether its based on a 401k or an IRA. The same form/format could be used by anybody establishing a SEPP plan. Iam going to delete the IRA reference simply because,if it generates confusion on this site itprobably willin actual
I appreciate your comments on rolling into an IRA vs 401k. The caveat is that my companies 401k has a uniquefund that would be difficult to duplicate in an IRA and I would like my balance to remain in that fund as it has for the last 30 years. Its safe
and conservative which is what you want for a SEPP. I intend to leave the balance in this account until the end of the SEPP.
I have talked to Vanguard and the company reps about the SEPP, and while everyone agrees that it can be done, the Vanguard forms for setting up the withdrawal don’t specifically state it as an option. That’s part of the impetus for this document, to make
my plans clear and document the provisions that allow it. I expect the5329 to be incorrectly coded but I gather from this forum that that is not unusual.
I retired in 2004 so I doubt that I will see any further contributions. I’m not saying that some other stuff can’t come out of the blue, but onceagain, documenting things now will help in the future.
2011-07-15 00:46, By: bn542, IP: [220.127.116.11]
L13: August SEPP
Actually, meb24’s post conformed to what the consensus has been in recent years regarding stub years.
The Arnold case involved Arnold taking a distribution prior to the mod date that was not a SEPP compliant distribution and was in excess of his annual amount. The 3 options meb stated all comply with what we have considered to
be SEPP distributions, and the IRS has not found any of them to be a problem.
In addition to taking out nothing in 2016 which is what you plan anyway, in the past we concluded that the full annual or pro rated amounts were also final stub year options since these are inherently calendar year plans. All
3 of the options were considered SEPP distributions. In addition, there was never a prior conclusion that taking out a full annual in the first stub year limited the final stub year to only the “take nothing” option.
Perhaps gfw can clarify why he felt your ONLY option in 2016 was to take out nothing. Who knows, in 2016 you might change your mind and need some money prior to the mod date.
2011-07-15 01:44, By: Alan S., IP: [18.104.22.168]
L14: August SEPP
The difference is in the fact that it is a 5-year plan and not an age 59.5 plan.
Move around a few dates from December to August and change the payment amount and you have the same situation defined by Arnold v Commissioner. The IRS has not changed their position on plans with facts similar to Arnold v Commissioner… In the 5
years, take no more and no less than 5 annual payments. After the plan ends, take anything you want.
2011-07-15 09:16, By: Gfw, IP: [22.214.171.124]
L15: August SEPP
I’ve had excellent, knowledgeable help from Vanguard in setting up my SEPP. They questioned that, as stated in the plan, there are distributions everyJanuary andJuly through 2015, but none in 2016 even though the
plan states an expiration date of 8/2016. I explained the minimum 5 annual distributions and minimum 5 years starting at the first withdrawal which they accepted, but that got me to thinking.
If this plan were to continue in perpetuum there would be distributions everyJanuary and everyJuly every year, includingJanuary andJuly 2016. There is an argument that could be made (by an overzealous IRA) that
by NOT taking a distribution inJanuary 2016 or July 2016, I’m deviating from the plan prior to its expiration, even though I’ve already received 5 years worth of distributions. Thoughts? At least I have 5 years to sort this out.
Note: I’ve actually changed the final version for distributions in Feb and August. I’m using January and July to be consistent withthe original post.
2011-08-02 13:33, By: bn542, IP: [126.96.36.199]
L16: August SEPP
I mostly agree with you. After reviewing Arnold v Commissioner at length, I do not find anything in the decision that requires a 5 year plan to distribute a max of 60 months worth of distributions, as long as the distributions
taken are considered to be SEPP distributions.
Here is the Arnold case:
As you can see, Arnold’s modification date was in Dec, 1994 because he took his first SEPP distribution in Dec 1989. Therefore he could not take a distribution prior to 12/94 that would not be considered a SEPP distribution.
He clearly was in violation because he took out 7,000 more in 1993 than he did in the prior years, and therefore clearly busted his plan. But the case does not directly indicate what Arnold COULD HAVE taken out in 1994 prior to his modification date had he
not busted his plan in 1993. Had he not busted it then, he should have been able to take his annual distribution in 1994. His plan encompasses 6 different calendar years.
There has been no evidence that the IRS would disallow a final stub year option of any of the following:
1) the full annual amount
2) an amount pro rated by the month
3) Nothing (as long as you have already distributed the 60 month MINIMUM)
In other words, the 60 months is a minimum, but not a maximum because these are still calendar year plans with a set modification date whether that date is set by the 5 year requirement OR the age 59.5 requirement if longer.
In fact, a large number of SEPP participants take out monthly or other periodic distributions and simply let them run until the modification date, meaning that many with a mod date 5 years after the first distribution take out
more than 60 months worth because they may have taken out 12 months worth in the first year. The IRS has not been busting these plans. Neither does the IRS seem to care if a final stub year pro rated distributions stops the month prior to the modification
date or includes the month of the modification date.
Therefore, you should still have your 3 options in 2016 as long as you took out 60 months worth as a MINIMUM.
Finally, since the IRS is capable of changing their mind about any of this, you should check into this issue again late in 2015 to make sure that the IRS has not changed their minds about any of this.
2011-08-02 19:47, By: Alan S., IP: [188.8.131.52]
L17: August SEPP
Except that the SEPP plan ends on the first plan modification date and after that date any amount can be taken and is not subject to the SEPP rules.
In Arnold, the IRS deemed the plan to end 365 days times five years plus a few days after the first distribution date – they seemed to be using a fiscal year for their opinion rather than a calendar year.
If yes and the initial withdrawal was annual, then there is no stub year and my opinion is that no additional withdrawal should occur before the first plan modification date – after the end of the 5-year period.
However, should they (the SEPP owner) decide to take an additional withdrawal within the 5-year window, their court case may change the Arnold decision. In Arnold, the individual was also over the age of 59.5 when the last withdrawal occured, but it occurred
in the 5-year window resulting in more than 5 times the initial annual distribution within the 5-year period.
2011-08-02 20:41, By: Gfw, IP: [184.108.40.206]
L18: August SEPP
“If yes and the initial withdrawal was annual, then there is no stub year “.
“should they (the SEPP owner) decide to take an additional withdrawal within the 5-year window,
their court case may change the Arnold decision.” ……..Don’t like court cases….lets not.
Best to wait until after the modification date in 2016.
Is there a method to get a clarification on this point other than a PLR or a court case? Would a simple letter requesting a clarification receive a response, ever?
2011-08-04 14:55, By: bn542, IP: [220.127.116.11]
L19: August SEPP
Would a simple letter requesting a clarification receive a response, ever?
You could try, but do you really think that they would send you for free for what they normally charge $10,000? And, if it isn’t a PLR to you, it also won’t be binding.
2011-08-04 15:29, By: Gfw, IP: [18.104.22.168]
L13: August SEPP
“I expect the 5329 to be incorrectly coded but I gather from this forum that that is not unusual.”
The 5329 will not be coded at all. It is the annual 1099-R form issued by the custodian that carries a code in box 7 that shows the particular distribution type.
You’re right that the 1099-R is most often incorrectly coded. Most custodians will show this as a “1”, when it should be a “2” for a SEPP plan. You file form 5329 with your annual tax filing to claim the proper exception to the 10% early withdrawal penalty
tax. If you use tax software, it should produce a correctly filled out 5329 for each tax filing while your SEPP is running.
2011-08-03 06:03, By: Ed_B, IP: [22.214.171.124]
L14: August SEPP
I was hoping that mistake would pass by without notice. Yes, I meant the 1099-R. I would also add that, if I were to prepare the SEPP Plan form again I would include a statement on the form to state that the 1099-R will be issued by Vanguard with a 1 in
box 7, and that a form 5329 will be included with each annual tax return to claim theexception to the 10% early withdrawal penalty tax.
2011-08-03 17:53, By: bn542, IP: [126.96.36.199]
L15: August SEPP
The frequency of payments is immaterial. You can change year-to-year, or even several times during a year. For example, you could take a 6-month semi-annual payment in January, then a 3-month quarterly payment in July, and then 3 monthly payments in Oct,
Nov, and Dec. The next year you could do the reverse. Another year you could take 1 annual payment. Another year you could take 12 monthly payments.
The stub year you have only 3 options, as indicated above, as to TOTAL AMOUNT, but the frequency is immaterial.
2011-08-03 20:17, By: dlzallestaxes, IP: [188.8.131.52]
L15: August SEPP
“I was hoping that mistake would pass by without notice.”
Heh heh… not likely on this site. Not that we’re nit pickers or anything but setting up a SEPP is an exact endeavor. It helps a lot if we are all on the same page and use the exact terminology that the IRS requires of a successful SEPP plan. That is
the main goal here… happy customers! 🙂
2011-08-03 23:15, By: Ed_B, IP: [184.108.40.206]