Confirming Wind-down plan
L1: Confirming Wind-down planI am ready to wind down my SEPP plan distributions. I believethat thanks to the helpful info here I am ready to move forward, but would appreciate confirmation.
This is an existing SEPP plan. My date of birth is 7/29/56. The date of the first distribution was 5/4/12, and I took a full year’s distribution at that time (about $23K). According to the calculators, my first modification date will be 5/5/2017.
Fullyear distributions in 2012, 2013, 2014, 2015, and 2016. This satisfies the minimum 60 month’s worth of distributions requirement.
I would like to have the option to take more money on an annual basis going forward, as my investments have done well, but I don’t want to bust my SEPP at this late stage. As I understand it, my options are:
1. Take the full annual amount in January of 2017. After May 5 of that year I can make additional withdrawals without restriction, but I will receive multiple 1099 forms and will need to be sure I account for everything properly at tax time.
2. Take a prorated amount of 5/12 the annual amount in January 2017. After May 5, I can again make additional withdrawals without restriction, with the same caveat of the added complexity of multiple 1099s.
3. Take nothing until 5/7/17, at which point my SEPP commitment is over and I have no more restrictions.
Do I have that right?
Option 3 is not good for me, as I do need the money to live on.
I prefer Option 1, as it gives me the most money at the beginning of the year, and I can either take or not take additional distributions for the rest of the year.
Option 2 is the same as Option 1 as far as the hassle of multiple 1099 forms. If I can’t take additional distributions, without penalty, under Option 1 then this would be the second best choice.
Do you think I will be OK choosing Option 1? Or have I misunderstood something?2016-11-21 16:08, By: kayroon, IP: [22.214.171.124]
L2: Confirming Wind-down planIt is very unusual that you would “need the money to live on” by taking 12 month’s worth ($23k) to cover just the first 4+ months. Option 2 gives you the opportunity to also consider the tax implications for 2017, like deferring 1 or 2 months into 2018 if you might be in a lower tax bracket after we see what the tax rates may be under the next administration. You can take 5/12 (about $ 10k) in January 2017 to cover the first 4+ months, and then take whatever you want whenever you want during the rest of 2017, and future years.
Multiple 1099-R forms isn’t really a hassle, and neither is a 5329 form, when applicable based upon 1099-R coding.2016-11-21 17:33, By: dlzallestaxes, IP: [126.96.36.199]
L3: Confirming Wind-down planI know that gfw (owner of this site)would state that Option 3 is the only option in this case since this is a 5 year plan, and 5 year plans do not have the flexible options of a plan ending at 59.5.
The key is how Arnold v. Commissioner is interpreted. That 1998 ruling concluded that until the 5th anniversary of the first SEPP distribution passes, any distribution that is not a 72t distribution will bust the plan. While in Arnold, the distribution he took was in the same tax year as an earlier distribution and would have clearly busted the plan in any case, inyour case the supposed 6th annual distribution would be in a6th calendaryear, so whether it would be considered a SEPP distribution or not might be debated between IRS examiners.
Since Option 1 would just be the 6th annual distribution in the same amount as the prior ones, the IRSmight not bust the plan. Nonetheless, it is not worth the gamble because two different examiners might make different conclusions about this, and you would be subject to luck of the draw. Option 3 is the only one that is undeniably safe. Note that if the plan is busted, the retroactive penalty only applies to distributions you took prior to reaching 59.5
As for two 1099 R forms, you probably will get only one (Code 7)no matter when you take a distribution in 2017because you would be over 59.5.2016-11-21 19:40, By: Alan S, IP: [188.8.131.52]
L4: Confirming Wind-down planI thought that I could convert from an annual distribution to a monthly one at any time, as long as the amounts were the same. That’s what I intended in Option 2: to convert to monthly distributions, and then take those through the modification date in May. Wouldn’t those monthly distributions be considered 72T distributions?2016-11-21 21:47, By: kayroon, IP: [184.108.40.206]
L5: Confirming Wind-down planYes, you can take 5 monthly distributions of 5/12 of your annual distribution, or take a full annual distribution before the May anniversary date.
Your posting seemed to indicate that you wanted to take the full annual distribution before that date, as your primary option.2016-11-21 21:52, By: dlzallestaxes, IP: [220.127.116.11]
L4: Confirming Wind-down planI agree with Alan… use option 3 just to be safe. The risk of the other 2 options isn’t really worth the possible reward, but that is up to you.2016-11-21 22:13, By: Gfw, IP: [18.104.22.168]
L5: Confirming Wind-down planThank you all for the advice. It confirms my understanding that the rules around 72T plans are not all that well defined! It would be so nice of the IRS to give examples of correct and incorrect distributions, especially around the end of the minimum five year period. I’m surprised that out of all those hundred+ pages of documentation they issued, a page couldn’t be spared for examples.
I appreciate the information on your site, gfw – you do a great service to the public.2016-11-23 14:29, By: kayroon, IP: [22.214.171.124]
L6: Confirming Wind-down planBringing about an awareness of turning 59.5 prior to the 60 month expiration or after makes a big difference and took me quite some time to understand. I’m sure the OP can figure out another way to fund himself during this short period rather than take a chance of busting the SEPP.
While we all owe a debt of gratitude to GFW, we also owe other great minds here who participate. I’ve been reading this site since 2006 and started my SEPP in 2012 and still check in on occasion to read here and keep my understanding to date. Great post Alan S!2016-11-25 16:22, By: Scott, IP: [126.96.36.199]