Begin SEPP in the middle of substantially equal payments

L1: Begin SEPP in the middle of substantially equal paymentsHello,
I am 55 years old. In July 2012 I began a regular withdrawl program from my rollover IRA, the same amount each month, thinking that I would claim the SEPP exemption with my 2012 taxes. Now I am having second thoughts, and wonder if it is better to just pay the penalty for thos six months of withdrawls last year, and claim the SEPP exemptions on my 2013 taxes for the entire year beginning in January. In a nutshell, I am concerned that starting the SEPP in the middle of the 2012 year like I did may make it less able to withstand the scrutiny of the IRS. So I would be willing to pay the penalties for those six months of 2012, and only claim the SEPP deduction starting on January 2013 when I file my 2013 taxes. Would it be a good idea to wait until I file my 2013 taxes to claim the SEPP exemption, or am I worried about nothing?2013-03-31 03:18, By: Denver, IP: [204.96.170.173]

L2: Begin SEPP in the middle of substantially equal paymentsDenver, If your calculations were correct, and you took 1/2 (or you could have taken all) of the calculated total withdrawal amount in 2012, with your July 2012 first payment date, then you should be fine, as long as you have a printout of the IRA showing the balance used to do your calculations, along with the specifics of the calculation values, including result to show them if they ever ask, along with printout of what you withdrew. Post the balance used (date of balance used) method used, and age attained in 2012, along with Int Rate used, along with the annual or monthly withdrawal amount that you used, and we can see if it makes sense.2013-03-31 03:38, By: Ken, IP: [108.20.30.158]

L3: Begin SEPP in the middle of substantially equal paymentsI think it was calculated correctly. I calculated using this site, but then the brokerage firm said they had to use their own calculation. Their amount was close to my amount, but not exact. The IRA balance used was $228,028 which was the 1/31/2012 month end balance. I did not use the 12/31/2011 month-end balance, because I split a portion off from the IRA in January to create second IRA that would not be subject to SEPP. Used Amortization method, with interest rate of 1.56%. I was 54 in 2012. Started taking the payments on July 6, 2012, and the 6th of each month thereafter. My calculation came out to $9,452 per year, but their calculation came out to be $9388. So rather than fight with them, I accepted their calculation. It comes out to $782.34 per month. Also, they listed a single life expectancy of 30.50 years in their paperwork, but I don’t know if that was part of their calculation. Thanks for your help. Denver2013-03-31 08:18, By: Denver, IP: [204.96.170.173]

L4: Begin SEPP in the middle of substantially equal paymentsDenver,
I got same answer that you got (leaving off the pennies) and since they wanted to compute it for you, and their answer is slightly less than the one on this site, you are safe, becauseyou can use a rate UP TO the published 120% mid term, so you did not exceed the max payment allowed, using their figure. I did see the max rate was 1.57% (from May ’12) that you could have used, and you listed 1.56% as the rate, which is also OK. I do not see a problem with anything you did, and I would not worry.Did their 1099-R for 2012 payments have a code “2” in box 7? If they computed the payments, I would hope they would have done that. If not, and it was a “1”, you just need to file a 5329 with your 2012tax return, citing 72T/SEPP as the reason for no penalty on the withdrawals, by putting”02″ in box 2. I filed those for several years with no problem.
One more thing. If you are already 55 now, and were 54 at year end 2012, then you were somewhere between 54 yrs 3 months and 54 yrs 6 months old when you started this in July 2012, so if you start over in 2013 (you would have to recompute with new yr end 2012 balance and rates, etc.) then your new plan would have to run an extra 6 months of withdrawals beyond what it will have to run now before you pass 59 1/2 and have also taken at least 5 years worth of SEPP payments. You cannot change the withdrawal before that window, other than switching to RMD method while SEPP is still in play. Continuing with it gives you more flexibility after passing those two required dates.2013-03-31 16:06, By: Ken, IP: [108.20.30.158]

L5: Begin SEPP in the middle of substantially equal paymentsKen,
Thanks for the feedback and reassurance. Yes I am already 55 this year. Since I am below the UP TO amount, then I am safe. Since the withdrawls have been flowing steadily with no problem, better to not rock the boat at this point. The brokerage firm, which I will nickname FD, put a “1” in box seven, which they told me they would do in advance. I think they do this for liability reasons, since they cannot control the account to prevent withdrawls that could break the SEPP. I use TurboTax to file my taxes, and note that it automatically fills out form 5329 with the gross annual amount of SEPP payments and “2” in box 2, as a result of my answers to their interview questions about the early withdrawls. So should be good there too. I will keep copies of the initial account balance, calculations and the monthly distributions in a safe place.
Happy Easter.
Denver2013-03-31 18:42, By: Denver, IP: [204.96.170.173]

L6: Begin SEPP in the middle of substantially equal paymentsJust don’t get caught in the “up to amount” – a SEPP calculation is an exact calculation, not an “up to” calculation.
There are are one or two brokerage firms that failed to change their calculations when RR 2002-62 was released with new examples. They are still calculating based on IRS Notice 89-25 which shouldn’t be a problem.
Just make sure that you get a paper copy of their calculations – on their letterhead – that outlines all the assumptions (age, interest rate, etc) used.
Should you at some point make a change in custodians – yes it can happen – and the new custodian may not accept the old calculations.
At any rate, if it were me, I would do my own calculations and be prepared to file an IRS Form 5329 to claim the exemption. Remember, a SEPP – like an IRA – is between you and the IRS. The IRS won’t say boo to the custodian, but you need to make sure that theydon’t scare you – the custodian is not really part of the equation except for possible administrative errors.2013-03-31 20:05, By: gfw, IP: [205.178.67.189]

L7: Begin SEPP in the middle of substantially equal paymentsThe one I am working with is Fidelity. I do have a letter detailing the parameters of their calculation, on their letterhead and signed by a senior retirement representative. I will be filing IRS form 5329 each year when I file taxes. Therefore, based upon this and everything else that has been said, I think that I am OK. Here is a question on a purely theoretical note: As long as the separately equal payments are done consistently throughout a five year period or longer, and the annual withdrawl amount is less than the maximum amount allowed per a properly formed initial calculation (with all the parameters correct, age, interest rate, initial balance, etc.), doesn’t it follow that the person is safely within IRS guidelines for this SEPP? I would think so, but I am a rookie at this…2013-03-31 21:43, By: Denver, IP: [204.96.170.173]

L8: Begin SEPP in the middle of substantially equal paymentsShort answer… NO.
If your annual distribution is calculated at $12,000, then you must take out $12,000 – no more and no less. Take any more or take any less and you will bust the SEPP.
As I stated earlier, don’t even think in terms of “up to”, think in terms of veryexact amounts.
Also… use our last payment calculator – is your plan a 5 year plan or a to age 65 plan? There are two different sets of rules and you need to know which rules apply to your plan.2013-03-31 21:55, By: Gfw, IP: [205.178.67.189]

L9: Begin SEPP in the middle of substantially equal paymentsOk, that is very good to know. In setting up the SEPP I did stick with the exact amounts per the calculation. My plan is a 5 year plan, with the five year period ending just about when I reach 59.5 years old, though I may let the withdrawls continue after that date. Rest assured, I will double check and triple check the date if I decide to stop withdrawls after the SEPP five year period has concluded – don’t want to break it right at the end!2013-03-31 22:18, By: Denver, IP: [204.96.170.173]

L4: Begin SEPP in the middle of substantially equal paymentsI think it would be helpful if you identified the brokerage firm which stated “they had to use their own calculation “. YOU are primarily responsible for the figures you use, unless the brokerage firm gives you a guaranteed writtenindemnification if the IRS does not agree withTHEIR calculation.
Also, others on this site can then comment on whether or not monthly vs annual distributions would account for a $ 64 difference between your calculation and theirs, or why these differences occur in general. Hopefully the brokerage firm gave you a written report of the methodology they used in their calculation so that you will have it in case the IRS audits you in the future.
I think that discussion should be started as a new thread by gfw/Ken/Alan, etc. for general reference in the future, and possibly added to the master topics for tyhis website.2013-03-31 16:13, By: dlzallestaxes, IP: [98.111.190.136]

L5: Begin SEPP in the middle of substantially equal paymentsJust a guess but if when using the Excel PMT formula you use a “1” instead of “0” for the “Type”, the distribution is less. Could they be figuring the payment at the beginning of the period vs the end?2013-03-31 16:55, By: Phil H., IP: [69.23.45.45]

L6: Begin SEPP in the middle of substantially equal paymentsYeah, not to sure about that. At any rate, as previously discussed it appears that I am in the safe zone and will go with it. It would likely cause more problems than it would solve if I tried to pursuade a big brokerage firm to change their standard ways just for me.
Denver
2013-03-31 18:48, By: Denver, IP: [204.96.170.173]

L5: Begin SEPP in the middle of substantially equal paymentsThanks for the feedback. I don’t want to identify them by name, but for fun let’s call them FD. The calculations were done for the annual amount, and the monthly amout was simple division. They did give at least the parameters of their calculation, but as Ken said since I am below the UP TO amount, not to worry.
Denver2013-03-31 18:46, By: Denver, IP: [204.96.170.173]

L6: Begin SEPP in the middle of substantially equal paymentsDenver,
My point in the “up to” amount we are all now mentioning, is that you can take the(lower) amount of the annual payment given to you by FD and then figure out the real percentage (with many decimals) for the SEPP distribution formula that works out to that distribution amount, and since it will be less than the max allowed percent of 1.57%, your plan will be a valid one. I am not aware than anyone is forced touse only the maximum percentage allowed in their calcs for it to be valid.2013-03-31 22:29, By: Ken, IP: [108.20.30.158]

L7: Begin SEPP in the middle of substantially equal paymentsKen,
I see what you are saying. Basically start with the withdrawl amount that is already in place, and figure out the percentage that yields that withdrawl amount. Work the problem backwards and come up with the percentage that I need to match the amount. Then I can use that calculation if I ever get audited. Good innovative thinking there.
Denver2013-04-01 04:08, By: Denver, IP: [204.96.170.173]