Client wants to blow up a current 72T and begin again

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L1: Client wants to blow up a current 72T and begin againI have a client with (2) 72T plans currently in effect. He is considering removing the smaller of the two from 72T staus and wishes to begin with hopefully a larger distribution. His plan has a surrenderamount of $140,00. He began the distributions in June 2009 with a balance of $137.596. His currently distribution is $536.00 monthly. He has received $6320 annually for 3 years so I assume his penalty will be $632 x 3 = $1896.00. Is this correct. I further assume that it is impossible for him to receive a higher amount due to the lower interest rate environment. Is it even possible to discontinue a 72T plan and pay the penalty then immediately start a new 72T plan if assuming the interest rate environment was such that someone could begin receiving higher distributions from an increase in the interest calculation?
Mark2012-09-18 17:12, By: Mark S., IP: []

L2: Client wants to blow up a current 72T and begin again1. In theory you are correct.If he has received $ 6,320/yr. for 36 months (“3 years”), then he would have received $ 18,960, and his 10% penalty would be $ 1,896.
2. BUT, if he began in June 2009, and has been taking monthly distributions of $ 536, then he has taken 39 ( or 40 if he has taken 1 in Sept 2012 already) payments, not 36. Therefore, he has taken an additional $ 1,608 ( or $ 2,144), and his penalty would be $ 161 (or $ 214) more.
3. However, $ 6,320/12 = $ 526.67/mo., so one of your figures is wrong.
4. Yes, it is possible to terminate a SEPP 72-T plan, and start a new one, although we usually suggest starting a new one in the month after the one in which you terminate the plan in order to minimize complexity/confusion re IRS reporting.
5. I assume that you mean that his plans are now worth $ 140,000 even though they started at $ 137,596 in June 2009, and he’s taken about $ 20,000 in distributions since then.
6. Since he has 2 plans, each plan stands on its own, so you have to do the calculations independently. Did you set him upp in these plans, or did he come to you afterwards ? Usually I would set up 2 plans with 1/3 and 2/3 in order to give flexibility if one had to be busted in the future.
7. You have to do the calculations because he has a higher account value, interest rates are lower, and you did not indicate his date of birth, which should be taken into consideration if he is 54 1/2 or older as far as any suggested plans and alternatives. Also, does he have a 401-k/403-b, and is he retiring or retired ?
8. Are you a financial planner, broker, or tax practitioner, since you said he is a “client”, so we can see which perspective you are considering this from.2012-09-18 18:59, By: dlzallestaxes, IP: []

L2: Client wants to blow up a current 72T and begin againMark:
I have some problems with several aspects of your post and I’ll address them in no particular order.
1. You appear to be rounding dollar amounts to whole dollars which is the #1 red flag with SEPP Plans. Rarely do plans calculate this way. To be compliant the calculations MUST be to the exact penny. But for my comments I’ll use your amounts.
2. You state that his monthly distribution is $536.00 and his yearly distributions for the last 3-years have been $6,320.00 annually. Do the math; $536 X 12 = $6,432.00, a difference of $112.00 which is a bust.
3. You stated, “I further assume that it is impossible for him to receive a higher amount due to the lower interest rate environment.” You got that right! Today’s low interest rates will definitely yield a much lower distribution amount than he is currently receiving.
4. You state that his current “surrender amount is $140,00” (which I assume you meant $140,000.00) so this must be in an annuity, Variable or Fixed. What is the current Market Value of the account before surrender charges are deducted? If your client wants more money … rather doesn’t want less money …he would benefit from the higher value (which I am assuming exists today) by leaving the current annuity as is and continuing current distributions … unless of course if the plan is already busted (see mysecond comment).
Based on your questions, it is my professional opinion that you don’t know enough about SEPP Plans to be advising clients. However, you have come to the right place to learn. I was in your boat in 1994 when I did my first 72(t) for a client and between the IRA custodian and this site … mostly this site … I have a good working knowledge of this subject. Yes, I asked some pretty dumb questions and the posters here were more than willing to help me with my education. So before you make any moves with your client’s accounts, do some homework. Start with the FAQ’s on this site and then purchase Bill Stecker’s book, also available on this site, and study it thoroughly. Then you will have the knowledge and confidence to set up a compliant SEPP Plan that will keep you out of trouble and show your client that you do know what you are talking about.
Good luck.
Jim F2012-09-18 19:22, By: Jim F, IP: []