Choosing a custodian, Investment Rate, Combining IRA’s

L1: Choosing a custodian, Investment Rate, Combining IRA’sI am wanting to set up a new SEPP plan, 8/16/63, first day of distribution 11/7/16. I have a Roth IRA of $170k and a conventional IRA of $750k with Vanguard. I was told they will not issue a1099R with a distribution code 2 in box 7 checked, so I will have to provide the IRS a 5329. Their claim is the IRS told them to no longer provide that for clients; it’s my responsibility. In reading this forum that seems untrue. I don’t feel comfortable with that so I’d like to find a company that provides a custodian withthe same low load that Vanguard does. Any recommendations?
In the calculator, how is the Investment Rate determined? If I want to maximize my distribution, I want to make that rate as high as possible.
Finally, in the calculator, can I combine the amounts of both IRA’s in the Total IRA Value?
Thank you2016-09-28 16:27, By: Bpower, IP: [67.177.186.52]

L2: Choosing a custodian, Investment Rate, Combining IRA’sFiling a 5329 is very easy using personal tax software, or by you tax preparer. Ir does not have any chance of causing an audit. Most companies will no longer file code 2 because of the fiduciary liability regulations. No company has any proof of the accuracy of any SEPP 72-T calculations because they usually do not have the documentation, and if someone does submit it, they often will not even look at it. Further, they have no idea at what information was not provided, such as other IRA’s, or if any of the selected IRA’s had non-deductible contributions.
There is no other mutual fund or brokerage agency that has lower fees, and Vanguard has an outstanding performance history.
I strongly suggest that you reconsider your reasoning. Vanguard has more IRA and 401-K plans than probably all of the other providers combined.
BTW, you would never want to combine ROTH IRA balances with Traditional IRA balances in setting up a SEPP 72-T, even if you could do it, but you cannot. If you are asking that question, you probably do not understand the benefits of having a ROTH IRA.2016-09-28 17:08, By: dlzallestaxes, IP: [108.36.116.44]

L3: Choosing a custodian, Investment Rate, Combining IRA’sOkay, good. Thank you.
So, next I use the calculator here, compare that to the number I get on the IRS site to make sure it’s the same, set up a separate IRA (no particular designation since neither Vanguard nor the IRS care) move theAmount to the SEPP Planfrom my IRA to the new IRA, take the amount calculated and withdraw it every year until I’m 59.5. Each year, I submit the 1099R and 5329 and that’s all there is to it. Right?
I’m not wanting to combine the Roth and reg IRA, but can I use the combined number in Total IRA Value found on the SEPP calculator on this site which presumably will increase the amount I can withdraw?
Secondly, how do I determine Investment Rate number that goes in the SEPP calculator? Dow Jones last 5 years? My results last 2 years?
Thank you for your help2016-09-28 19:17, By: Bpower, IP: [99.175.229.73]

L4: Choosing a custodian, Investment Rate, Combining IRA’sNO, YOU CANNOT USE THE ROTH IRA TO CALCULATE YOUR SEPP 72-T DISTRIBUTIONS.2016-09-28 19:25, By: dlzallestaxes, IP: [108.36.116.44]

L2: Choosing a custodian, Investment Rate, Combining IRA’sI would keep them separate as DLZ stated and keep the Roth IRA for emergencies. If you have read this forum much, you would have read that they often strongly recommend having a separate IRA to withdraw money from in the case of emergencies.2016-09-28 19:23, By: Red Baron, IP: [24.171.38.187]

L3: Choosing a custodian, Investment Rate, Combining IRA’sIf you want to increase your federal income taxes, increase your tax complexity, increase the probability of an audit by the IRS, and increase your professional fees to defend you under audit, then go ahead and include the ROTH IRA because you do not want to listen to the advice from these experts. But then do not come back and say that we did not warn you not to use the ROTH IRA balance in your calculation, and not to combine the ROTH IRA with the Traditional IRA in the same account for your SEPP 72-T.2016-09-28 19:34, By: dlzallestaxes, IP: [108.36.116.44]

L4: Choosing a custodian, Investment Rate, Combining IRA’sI think I’ve got it! Set up a separate IRA, call it 72t, use the aforementioned to calculate the amount ONLY from my conventional IRA. Thank you gentlemen.
How do I determineInvestment Rate for the calculation?2016-09-28 19:54, By: bpower98, IP: [71.236.44.46]

L5: Choosing a custodian, Investment Rate, Combining IRA’sThe investment rate has no impact on the SEPP – it is only there for illustrative purposes.2016-09-28 19:59, By: Gfw, IP: [205.178.65.222]

L6: Choosing a custodian, Investment Rate, Combining IRA’sThe primary thing to watch is that you do not lock your investments into yields that are less that your annual required distributions. For example, an annuity yielding 3% on $ 100,000 when your distribution is $ 4,000 or $ 5,000/year and the rest of your SEPP is in stocks or funds with low or no cash dividends. Of course, you can always sell some of the investments, but you cannot get out of your annuity in most situations.2016-09-28 20:07, By: dlzallestaxes, IP: [108.36.116.44]

L7: Choosing a custodian, Investment Rate, Combining IRA’sThe following is copied from an article by Bill Stecker around 2004. He is an authority on SEPP plans and some of his information is already posted on this site. I concur that a Roth IRA and a TIRA can be combined in a SEPP universe and that the IRA owner has the choice of which type IRA to tap subject to their differing tax rules. Therefore, there is some control of your tax bill in a given year. Further, if you are tapping conversion money held under 5 years, the 72t exception will waive the 10% penalty. Finally, the IRS Regs specifically allow for conversion to a Roth within a SEPP plan which would obviously result in a SEPP universe including both IRA accounts.
SEPP PLANS COMBINING REGULAR & ROTH IRAsThis author’s first reaction was no; second reaction was maybe; third reaction was I don’t know, I had better go find out. We rephrased the question a bit to ask: can the balances of a traditional IRA and a ROTH IRA can be logically combined in the design of a SEPP plan?۝ This question, in turn, poses three separate questions as follows:(1) Is the combination of a Traditional IRA and a Roth IRA permissible for IRC 72(t)(2(A)(iv) purposes?(2) Presuming the answer to (1) above is affirmative, what are the ordinary income tax consequences of those distributions?(3) Related to (2) above, would any recapture taxes, as imposed by IRC 408A(d)(3)(F)(i) be applicable?We necessarily need to begin with IRC 72(t) itself. It says, in part: If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.۝. Said another way, if you take a distribution from a qualified retirement plan, such distribution is potentially includible in gross income and to the extent includible, not only will it be taxed but an additional 10% surtax will also be applied. IRC 72(t) goes on to provide a dozen exceptions to the 10% surtax including IRC 72(t)(2)(A)(iv), substantially equal periodic payments۝. More important at this point in the discussion is IRC 72(t)’s definition of a qualified retirement plan۝ or QRP. Our next stop is IRC 4974 to understand the precise definition of a QRP. IRC 4974(c) says in part, that QRP’s include an individual retirement account described in section 408(a)163.۝ In summary, traditional IRAs are definitionally included as a type of QRP and are therefore subject to taxation under IRC 72(t).Next we need to similarly examine Roth IRAs which are governed by different code sections164. IRC 408A says in part: except as provided in this section, a Roth IRA shall be treated…in the same manner as an individual retirement plan…(b)…the term Roth IRA۝ means an individual retirement plan (as defined in section 7701(a)(37))…۝ The question then arises, is an individual retirement plan, IRP, the same or different than a QRP? To answer this question, we next visit IRC 7701(a)(37) which says that an IRP is an individual retirement account described in section 408(a).۝165 Actually, we will find exceptions in IRC 408A, but no to the fundamental character of how to treat with IRAs defined in IRC 408(a) versus IRC 408A.166 IRC 72, 408(a), 408(d)(2) & IRS Reg. 1.401(a)(9). 167 In this case, IRC 72 was originally drafted with annuities in mind. In our situation, the same concept applies, however, investment in contract۝ means the same thing as basis in account۝. 97. To summarize, unless we can find an exception in IRC 408A165, a Roth IRA is to be considered the same as a traditional IRA defined in IRC 408(a).In sum total, we travel through at least five different code sections (IRC 72, 4974(c), 408(a), 408A & 7701(a)(37)) all to learn that QRPs, IRPs, IRAs and Roth IRAs are all the same thing. Said another way, for purposes of applying IRC 72(t), a traditional IRA and a Roth IRA are treated in the same manner unless a specific exception can be found in IRC 408A. Lastly, taxpayers have always had the option of treating their IRAs discretely or logically combining them for purposes of computing distributions under IRC 72(t). Therefore, albeit at first appearance illogical, we came to the conclusion that one may combine a traditional IRA with a Roth IRA for purposes of computing substantially equal periodic payments as defined in IRC 72(t)(2)(A)(iv). Thus, the fundamental question #1 posed at the opening of this section is yes.2016-09-28 23:00, By: Alan S, IP: [160.3.87.235]

L8: Choosing a custodian, Investment Rate, Combining IRA’sFurther to the above, the fact that you could do this does not mean you should. While including a Roth balance in the SEPP universe will increase the SEPP calculation, if you leave the Roth out, your basis in regular contributions and conversion over 5 years can be withdrawn at anytime tax free and therefore could be used as insurance to save your SEPP if you need more money at some point. However, if you tap a conversion less than 5 years old, the penalty will be due because the Roth is not part of the SEPP.
Note that a partial conversion mid term of a SEPP could possibly run afoul of the partial transfer PLR busting a plan. The IRS has done this on a couple occasions, but have let thousands of other partial transfers pass. If you start your SEPP using two IRA types from the beginning, the partial transfer risk is eliminated.
However, most IRS examiners are not up to speed on SEPPs in general. And you can be sure that most of them have never seen a SEPP established using a TIRA and a Roth IRA. Therefore, there is a decent chance that you will have to educate and convince them that this is possible. The IRS Reg allowing a conversion is probably your best option there although you could also use some of Bill’s IRS codelogic.2016-09-28 23:16, By: Alan S, IP: [160.3.87.235]

L9: Choosing a custodian, Investment Rate, Combining IRA’sHowever, the problem then becomes the 5329, and trying to figure out how to report the taxable portion vs the non-taxable ROTH portion. This would probably involve using form 8606 every year to determine the applicable ratio, because the taxpayer cannot try to specify whether he is withdrawing only Taxable distributions, or only non-taxable ROTH distributions, or anything other than a strict ration of the balances initially used in setting up the SEPP.
If the ROTH is $ 150,000 and the Traditional is $ 600,000 then 20% ($ 150K/$ 750K) of all distributions would be non-taxable, and 80% taxable ( $600K/$ 750K).
If one of my clients wanted to follow this approach, I would suggest that they get a new accountant because I would not want to be involved in the lengthy correspondence with the IRS, and my fees would probably exceed the additional distributions that would be attributed to the ROTH portion. Further, I would advise the client that this could be an annual situation because the IRS does not track items like this from year to year. In addition, unfortunately you would have to start from scratch to explain it to a different IRS auditor every year.2016-09-29 00:04, By: dlzallestaxes, IP: [108.36.116.44]

L10: Choosing a custodian, Investment Rate, Combining IRA’sI agree with all the potential IRS issues explaining the rationale every year. However, the tax reporting should not be difficult.
If there is basis in the TIRA, an annual 8606 is needed every year to determine the taxable portion under the pro rating methodology. For any SEPP with more than one IRA account included in the SEPP universe, the distribution can be taken from any of the accounts. Likewise, with a Roth IRA included, the taxpayer should be able to elect in any given year how much of the annual SEPP distribution is taken from the Roth vs the TIRA. For the Roth portion, the 8606 would be no different than for any Roth distribution as the usual ordering rules would apply.
Taking the most complex combination, a TIRA with basis and a Roth IRA with it’s own separate basis, the 8606 would pro rate the TIRA basis in Part I, and the Roth distribution would be reported on Part III. Totally separate taxable amounts would show on line 15 and 25 respectively, and the total taxable amount would flow to line 15b. As for SEPP compliance, the IRS would be looking at line 15a, gross distributions rather than the taxable amount.
The 5329 would be needed to waive the 10% penalty for the taxable amount of TIRA distributionsand less than 5 year conversions or Roth earnings that come out under the Roth ordering rules. The Roth part is messy, but no different than if there was no SEPP.
Again, the taxpayer should be OK, but probably only after an annual hassle from the IRS. Doing this would have to produce a major advantage to justify inviting annual issues explaining this to the IRS – Or the IRS may never question it, as that appears in many cases to the luck of the draw.2016-09-29 04:00, By: Alan S, IP: [160.3.87.235]