L1: Correct method?Great site here. Thanks. I am considering initiating 2 SEPPs from 2 seperate Vanguard accounts. After reading numerous sites I believe the following steps are what I should do;1) I want distributions to begin January 2010. I therefore use my account balances of December 31, 2009. Does it have to be that exact day or another day of the month?2) I calculate distributions, probably using the amoritization method, using current 120% interest rates. 3) I tell Vanguard to send distributions to my checking account monthly for 5 years, 60 payments. I am presently 56 years old.4) Vanguard sends me a 1099R annually.5) I fill out a 5329 annually.6) I pay taxes on the income because it is from 401Ks from previous employers, long ago.7) Am I missing something here? What documentation should be kept if there are future questions from IRS?Thanks again.2009-11-02 18:46, By: Bills, IP: [188.8.131.52]
L2: Correct method?Your account balance does not HAVE to be a 12/31 balance, and the IRS says that you can use a date up to 6 months prior to your start date. That said, the IRS also says that the account balance you use must be reasonable in relation to your balance on the actual start date. For example, if you wanted to use the 9/30/09 balance, that would be OK as long as the account values in January are not more than 10-15% different than the 9/30 valuation. All else being equal, it is a good idea to use the 12/31/09 value if you can since it is easier to document, ie. statements and Form 5498 reports are readily available to both you and the IRS. If you set up monthly payments, make the payment date early in the month. This will give you time to clean up any errors in the annual total in December, and prior to the Holiday rush. If the start up is delayed somewhat, just order a two month distribution late in January, and start the monthly payments in early March. Your comment about “2 SEPPs” needs clarification. Do you mean two totally independent plans, or ONE plan using two different IRA accounts?Vanguard uses some confusing account platforms, so you should discuss with them and get them to recognize how your accounts and SEPP plans are set up. Transfers between the account numbers CANNOT take place unless the accounts are all part of the same SEPP plan. Otherwise, you will bust both plans.The rest of your post appears correct. There is a sample documentation worksheet on this site that you can use to document your plan calculations, account balances and account numbers, etc. But you need to get the number plans question resolved first.2009-11-02 21:01, By: Alan S., IP: [184.108.40.206]
L3: Correct method?Alan, thanks for the response. I have several accounts with Vanguard, with different ID #s. I have selected 2 existing accounts with the proper $ in them to provide future income. One account is rather conservative with Bonds, the other is more aggresive. I was not going to combine them because I like the diversity as it is, unless there is some advantages to me or ease of accounting.Does this define 2 SEPP accounts or 1?Also, Vanguard says I can changeor modify theholdings within the account, but can not add to it.For example, I could modify the mix in either account to try and enhance profits as time goes on. Sound right to you?2009-11-02 22:07, By: Bills, IP: [220.127.116.11]
L4: Correct method?Bills:Sounds to me as if you are off to a good start on setting up your 72t / SEPP.As to documentation, a 3-ring binder works well to collect ALL of the paperwork that is associated with a 72t plan. Include everything in this that has anything at all to do with your 72t plan, including electronic info. You never know for sure what will be needed for an IRS inquiry. Being fully prepared is your best defense, should your plan ever come to question. Printouts of your annual account statements are also good since they show the account balance and the distribution amounts as of 12/31 of each year.The 1st thing in your plan should be astatement of your intent to start a 72t plan for your records. In this document, state that you are setting up a 72t plan on date mm/dd/yyyy andwhich of the 3 IRS approved calculation methodsyou are using. Also state the interest rate you are using and document the Federal Mid-term Rate from a web site that has this info. Make sure that the date and web site addressappear on the printout of this info. Addthe printout page to your statement as page 2. You can use a rate that is up to 120% of the Federal Mid-term rate from either of the 2 months previous to the start of your 72t distributions. Including the planstarting and ending dates is also good. Vanguard has a brochure that can be downloaded from their web site that describes the 72t exception and the procedure needed to set up a plan and do the necessary calculations. This 20 page brochure is an Adobe Acrobat file and provides a good explanation of how the 72t exception to the 10% early withdrawal penalty works. The brochure is titled “Taking Substantially Equal Periodic Payments” and can be found by searching the Vanguard web site for “SEPP” or via the following URL:https://personal.vanguard.com/us/LiteratureRequest?FW_Activity=ViewOnlineActivity&litID=2210025466&FW_Event=start&view_mode=web&usage_cat2=&viewLitID=2210025466&formName=Substantially+Equal+Periodic+Payments+(SEPPs)&vendorID=S164&cbdForceDomain=trueRegards,Ed_B2009-11-03 00:20, By: Ed_B, IP: [18.104.22.168]
L4: Correct method?Bills,Ed’s last post (below) is all good information. Note that the 120% modification is already included in the rates posted on this site, so do NOT increase those rates again.What Vanguard told you about changing investments in your 72t IRA accounts is correct. There is no restriction on these changes, butNO distributions that are NOT 72t distributions are allowed, and no contributions are allowed. Any transfers to another IRA can only be doneto a NEW IRA account with -0- balance OR to another IRA account that is part of the same plan. This is why I inquired whether your two accounts will be in the same plan OR in different independent 72t plans. It will be less confusing if you include them in a single 72t plan. If you want to isolate a second IRA accountfor emergency purposes outside your 72tplan, that is a good idea. It will allow you to take distributions from it that will be subject to penalty, but will allow you to save your 72t plan from the much largerretroactive penalties and interestthatwill hit you if you takeextra amounts from the plan IRA account.Your two accounts CAN be in the same plan. Justcomplete the documentation to show that and use the total account balances as your initial balance. The two accounts will thenbe considered as your “SEPP universe”. You can even transfer amounts directly between the two accounts if you want to, but Idiscourage that activity unless there is a good reason for it. Your exact SEPP distribution cancome from any combination of the two accounts you wish, or all fromjust one account if you prefer. The key is not to get mixed up with the various accounts and how many SEPP plan that you actually have.Any other questions, please advise.2009-11-03 01:30, By: Alan S., IP: [22.214.171.124]
L3: Correct method?Alan, could you give me a clarification on your quote below?:
“Your account balance does not HAVE to be a 12/31 balance, and the IRS says that you can use a date up to 6 months prior to your start date.”
I don’t recall ever seeing a reference to “6 months” in any IRS rules. Also, isn’t it true that all 72 (t) distributions after the first one must be based on the December 31 balance of the previous year, regardless of when in the year they are taken?
2009-11-03 08:56, By: Eureka, IP: [126.96.36.199]
L4: Correct method?The 6 months comes from Revenue Ruling 2002-62 which states…
(d) Account balance. The account balance that is used to determine payments must be determined in a reasonable manner based on the facts and circumstances. For example, for an IRA with daily valuations that made its first distribution on July 15, 2003, it would be reasonable to determine the yearly account balance when using the required minimum distribution method based on the value of the IRA from December 31, 2002 to July 15, 2003. For subsequent years, under the required minimum distribution method, it would be reasonable to use the value either on the December 31 of the prior year or on a date within a reasonable period before that year’s distribution.
The account balance used – – for any calculation – must be reasonable. The reasonable part is probably more critical that the 6 months.
If using the Minimum Distribution method, you should use the previous 12/31 balance for all future years. For the amortization and annuity method not using recalculation, the account balance doesn’t come into play. If using recalculation, then the previous 12/31 is a good date to use to for the balance, previous November/December for the interest rate and age in the distribution year. Our sample form contains annual recalculation options.
2009-11-03 10:06, By: Gfw, IP: [188.8.131.52]
L5: Correct method?I interpret this IRS wording to mean that you have to select an account balance DATE which is reasonable, not an account balance AMOUNT that is reasonable. There have been several recent postings that used the “amount” interpretation, but I do not think that makes any sense. If the valuations varied significantly over an extended period of time, I do not that the IRS has any right to tell you which date or amount is “reasonable”, so long as the DATE falls within a reasonable period of time. Starting in Oct-Dec would probably not allow choosing the prior 12/31, but with the recent gyrations of the stock and bond markets, and bankruptcies of companies, I think you could select whatever date/amount within a reasonable period.The IRS statement merely says that the account balance must be DETERMINED in a reasonable manner based upon the facts and circumstances, not that the AMOUNT must be reasonable.2009-11-03 18:21, By: dlzallestaxes, IP: [184.108.40.206]
L6: Correct method?Dlz… I think we have to agree to disagree.Do you really think that the IRS would consider it reasonable based on “facts and circumstances” to say that if you account on July 1 is $1,000,000 and your account balanceon December 1st is $250,000 -that it is reasonable to base the distribution on the$1,000,000 account balance rather than the $250,000?The example in Rev. Rul. 2002-62 is just that, an example based on dates. It also states that it must be reasonable based on the facts and circumstances. While the IRS may have no right to define reasonable, it would bevery expensive to win (or lose)the case if tested. 2009-11-03 19:02, By: Gfw, IP: [220.127.116.11]
L7: Correct method?I understand your point, but I do not believe that it is practical. Why would some choose the significantly higher account balance and therefore 4 times higher annual distributions, which would discipate the remaining balance 4 times faster ?If the figures were reversed, do you think that the IRS would say that you had to use the $ 250,000 balance from 11/30 rather than $ 1,000,000 as of 12/31, or a date and value sometime during Dec ? I don’t think so. And I doubt that the IRS would challenge my rationale or reasoning in this regard. ( P.S. I’ve never lost an IRS audit !!! Fortunately I’ve only had 10 in 45 years of practice.)2009-11-03 19:15, By: dlzallestaxes, IP: [18.104.22.168]
L8: Correct method?>>If the figures were reversed, do you think that the IRS would say that you had to use the $ 250,000No simply because the $1,000,000 represents a reasonable representation of the actual account balance when the plan was initiated.>>Why would some choose the significantly higher account balanceFollowing all the posts, one of the most frequently askedquestions is how do I get more? Another is can I buy a 5 or 10 year annuity?To me (and probably the IRS) it makes sense that the assumptions when the plan begins are reasonable in the aggregate. They have clearly defined the definition of interest rate and age, there is only one variable left… the account balance which to me is defined as a reasonable representation of the actual account balance when the plan starts. My example may have stretched possibilities, but I would hate to be on the receiving end of an audit and have to justify a substantial difference in account values from the value used to calculate the initial payment. Like I said, I think we will have to agree to disagree – I surely wouldn’t want to be the test case. 2009-11-03 19:32, By: Gfw, IP: [22.214.171.124]
L9: Correct method?” and have to justify a substantial difference in account values from the values used for the initial payment”I would expect that the values used for the initial payment would be the amount used for the calculation. Or are you saying that there is a significant difference between the account balance immediately before the initial payment vs the value used for determining the amount of the annual payment ? If the latter I do not believe that the IRS anywhere makes that distinction. It only addresses the reasonableness of the approach that is used. For example, they want you to use a specific date, not an average of dates. They do not want you to use any “discounting” techniques, such as are used in estate valuation of FLPs or family businesses.I think we have beaten this one to death, and we agree to disagree. Obviously no one else cares because no one else has responded.P.S. I’d even take on the IRS on one of these cases on a “contingent fee basis”.2009-11-03 19:59, By: dlzallestaxes, IP: [126.96.36.199]
L10: Correct method?>>Or are you saying that there is a significant difference between the account balance immediately before the initial payment vs the value used for determining the amount of the annual payment?I’m saying that the”value used for determining the amount of the annual payment” must be a reasonable representation of the account value when the calculations are made.Have a great day!2009-11-03 20:07, By: Gfw, IP: [188.8.131.52]