As I write these questions, I know they sound paranoid, LOL, but all the documentation seems to constantly threaten how difficult this process is when it seems mostly straight forward. Financial advisors are always threatening “do not try this at home.” So, a couple of what seem overly detailed questions but what the heck.
1. Should I care about whether the annual distribution is down to the pennies? It seems awkward to have the amount be, let’s say, $25,102.06 when I would prefer it to simply be $25,000. However, in order to get that detail, the % needs to be 3.65753792150308% or we end up with some dollar/penny differences. The calculator on this site doesn’t go down to that level of detail (and probably doesn’t need to). After reading the guidance by William J. Stecker, CPA on De minimus: What is diminimus to the Internal Revenue Service? One dollar. The IRS permits rounding or truncation of pennies on a tax return, but you do not get to round to the nearest $10 or $100. This concept comes into play in two circumstances; calculations and cash transactions.”
So, if I use a Balance of $455,000, a DF of 30.5 (based on other inputs), and a rate of 3.6575% (which this site calculator rounds to 3.66 in the output although it calculates at the higher decimal number), the output I receive is $24,999.88 which I can then round to $25,000 according to De Minimus rules.
In my “evidence” paperwork should I include the 4 decimal places number? If I calculate for 3.66% (in excel or on this site) I end up with $25,007.73 which could not be rounded to $25,000 according to the De Minimus rules.
2. When using the site calculator, it gives me 6 years of distributions, however, I have been told on this site (see my previous post) that I don’t have to take the distribution the last year (but I can if I want, just have to take prior to my 59.5 date) because I turn 59.5 in September 2024 and will have already taken 5 years (2019-2023). I don’t understand why this is so confusing (or at least to me). Why do I not have to take the distribution in 2024? I’m going to read the guidance again and see what I come up with but I thought you might have a quick answer 😉 I posted this question with the calculator output showing 6 distributions on my previous post but didn’t get a response on my final post.
I hope these questions are not too crazy confusing. I really, really appreciate the knowledge and feedback provided here.
For original information, see my (SKRAM) original post.
2019-01-04 16:08, By: SKRAM, IP: [126.96.36.199]
1) If you want to carry out the interest rate to 4 decimal places, it should be OK. But there may be some risk of error as the calculator here and those elsewhere may not support that many decimal places. If you want to set up intra year periodic payments, that will produce another rounding requirement to deal with (25000/12 = 2,083.33). While the IRS is not out to bust your plan due to minor rounding errors, you should not be knocking 7.73 off the annual distribution as that is not minor, so if you want to arrive at 25000 even that bad, then you have tweak the interest rate lower like you are doing, just do not mess up.
2) A SEPP is a calendar year plan. Your plan is not a 5 year plan, as it terminates at 59.5 in a final stub year. There is no distribution required until the year actually ends, but your plan ends before 2024 ends, so there is no distribution required. However, if you WANT TO take a distribution, it must comply with SEPP requirements, either a full annual or pro rate of the annual. These 3 options have not been questioned by the IRS in overseeing thousands of SEPP distributions every year. However, the options are not clearly stated in any IRS guidance but they must have been grounded in some tax court, PLR, or other IRS ruling at some point many years ago. I do not have specific references for any of these and I cannot recall ever seeing such references.
2019-01-04 16:45, By: Alan S, IP: [188.8.131.52]
Many people become paranoid when they look at all of the rules involving SEPP 72-T plans. The professionals on this website try to minimize your angst. However, many people overthink the situation, or try to work at the edges. I think it is easier to KISS, rather than get overly complex.
YOU have the option of the following:
1. How much do you need/want to be distributed ?
2. Do you want the taxes to be withheld and remitted to the IRS (and state), or do you want to submit estimated payments yourself ?
3. Do you want distributions monthly, annually, or some other frequency?
4. Do you want an exact amount, or an amount close to it, as an annual total, i.e. an annual amount divisible by 12 on a monthly basis ?
5. Do you want to use all of your IRA, or are you receptive to setting aside some of it for a future emergency so you won’t bust the plan ?
6. Do you mind calculating an interest rate a little less than the Maximum rate ?
7. Do you mind using a balance other than the end of the latest month?
8. Have you considered tax implications re tax brackets ?
9. Have you considered when you want to start, and if you want to take a full year’s worth the first year, or prorata ?
10. You have to consider how much you want to take in the last year, i.e. -0-, pro rata, or 100%.
There is no “cookie cutter” answer. Everyone has to make his own decision.
There are a limited number of financial advisors (who are different from investment advisors or brokers) and tax practitioners who really understand most, let alone all, of the issues discussed on this website. Many people like the comfort of working with qualified professionals in this process. Tax and cash flow planning should be an integral part. Rarely do taxpayers understand the age 55 rules for 401-K or 403-B plans, or NUA provisions, either of which might mean that a SEPP 72-T plan may not be the appropriate approach.
2019-01-04 17:21, By: dlzallestaxes, IP: [184.108.40.206]
1. When I started my SEPP last year I had the same desire to go with a nice round number. From everything I understood you could use any interest rate that was less than the published rate. So if the calculator gives you greater than $25,000 and you withdraw $25,000, then by the laws of math you must be using a rate lower than published. I don’t know that you have to document that exact rate anywhere. If you ever got audited, you would show what the max rate was and could document that the rate you used must have been lower since you received a lower withdraw. (And I’m not one of the professionals on this site but have been following for a while.)
2019-01-04 17:29, By: Moderatelynewbie, IP: [220.127.116.11]