Ending the plan
L1: Ending the plan
I have a client who began her withdrawals in 2000 and will turn 59 1/2 June 8 of 2012.
She has been taking monthly withdrawals for these past ten plus years.
She only has one asset left in her IRA. It is a Direct Participation Program. (You would relate to it as a Limited Partnership, which is what it looks like.) The plan was based on California real estate, which of course had a big disruption in business
in 2008 and beyond. Their cash flow all but stopped and they have had to go out and take over properties and rehabilitate them. Hence they froze their liquidations even though they will come out of this and do well at some point in the future.
So her IRA has a total value of $33,245 and with only $2900 in cash. We had to stop distributions in October. She has been taking $3864 monthly for all these years.
I believed that it was to age 59 1/2 or 5 years, whichever was longer. So I’ve thought we had to put out distributions until next June. My plan has been to do the one timerecalculation due to hardship, and according to your calculator distribute an annual
amount of $1539.05. This is also $128.05 monthly. So I can pay Oct Nov and Dec right now totaled $384.15, and the rest monthly until June??
Thanks for being here with this wonderful service. I’ve searched and searched in my usual research material and there is very little on this topic.
2011-12-15 00:46, By: Jayne, IP: [184.108.40.206]
L2: Ending the plan
Sorry… But you are probably too late to make the change this year as the amount already distributed would exceed the amount calculated using the MD method.
Try and make the Nov & Dec payments per the current SEPP. In 2012, the year that she turns 59.5, she wouldn’t have to take any distribution.
2011-12-15 15:01, By: Gfw, IP: [220.127.116.11]
L3: Ending the plan
OK, I checked my files (I was writing from a day long medical appt yesterday) and we stopped in August. The point is she doesn’t have enough money to make any more payments at $3860 a month. She started payments in May that many years ago.
What to do? I searched everywhere in the financial community resources before this and found very little. I’m embarrassed that I hadn’t just googled, that’s how I found you. I had called several retirement depts in a few large firms even.
2011-12-15 17:19, By: Jayne, IP: [18.104.22.168]
L4: Ending the plan
You said that she had $33k in the account – can it be liquidated or is teh value of it really zero?
If the plan goes to zero assets, the SEPP Ends and there would be no penalty.
2011-12-15 17:26, By: Gfw, IP: [22.214.171.124]
L5: Ending the plan
it’s frozen, won’t liquidate at all. it DOES have value. I may be able to move shares to her non qualified account, but she would be obligated to pay taxes on money she didn’t receive and may not if the investment doesn’t pan out.
I guess my decision is whether to transfer shares of this equivalent to the months of what she’s missed from her IRA to her Non Qual acct. But she will be paying taxes on money she didn’t receive. It will be around $20,000. Better than 10% of $560,000.
She frankly doesn’t have it. Could we use hardship to recalculate mid year?
2011-12-15 17:31, By: Jayne, IP: [126.96.36.199]
L6: Ending the plan
Distributing the shares out of the IRA is probably the best and safest way to preserve the plan. You would have to figure the # of shares needed to round out the distribution requirement for the year, and supplement it with some
cash to make it come out exactly even. Making the one time switch to the MD method mid year is not clearly disallowed, but it would likely result in all kinds of questions and scrutiny from the IRS, and therefore has considerable risk.
I don’t follow the 20,000 extra in taxes from under 8k of additional distributions. In any event the 1099R issued in January must show the exact required annual total.
As gfw indicated, there are no distributions required in 2012 which is probably the best choice at this point. After reaching 59.5 her plan is over and she can do whatever she wishes after that date.
2011-12-15 19:09, By: Alan S., IP: [188.8.131.52]
L7: Ending the plan
Thanks very much for your help.
To clarify, we will be distributing around $20,000.I checked my files and the money ran out a few months earlier than I remembered. (I wasn’t at work when Isubmitted my problem yesterday).That is not the amount of tax. My sentence was confusing.
I will distribute theshares.We have not missedonepayment all of these years, and there shouldn’t be anything for them to find should we be audited. However, triggering thatprocess, even if it turns out ok, is painful enough to pay taxes on $20,000
that you don’t have to.
Thanks again. I’m so relieved to have found this site. Finally, people that work with this strategy and are familiar with the quirks and potential traps!
One, final question. If we DID recalculate, how do we indicate that? Write a letter to the Custodian for their file? Is there any way to communicatethe detailsto the IRS? Is this not recommended anyway?
2011-12-15 19:40, By: Jayne, IP: [184.108.40.206]
L8: Ending the plan
You don’t inform the IRS and if you do decide to re-calculate, you should know that you are going into uncharted waters. Most agree that if you have already distributed more than the result of the new calculation, that you can’t do a re-calculation. However,
it has never been tested, but it is an awful lot to risk if you look at 10% penalties, plus past due interest on the penalties associated with all previous distributions.
If you do decide to test it, please comeback and let us know how it turned out.
You keep using $20,000 – maybe you are just estimating. You need to distribute an amount equal to the required annual distribution less the amount already distributed. The result should have a variance of no more than $0.50
2011-12-15 19:50, By: Gfw, IP: [220.127.116.11]
L9: Ending the plan
I am planning to distribute shares. I haven’t made the exact calculation, it will be around $20,000. I used that number fora general concept of how much it will cost. Yes, of course I will be exact. Thanks for the 50 cents number, I would have used
I am an investment advisor,and don’t have a lot of experience with the IRS.
During my researching, reading, calling, etc. these last couple of months to find an answer I’ve always wondered how to document the recalculation other than my files. That is why I asked- not that I would recommend my client risk penalties and interest
on her entire withdrawal amountfrom these past 10 years.
Thanks again for all of your help.
2011-12-15 20:11, By: Jayne, IP: [18.104.22.168]
L9: Ending the plan
Since you used the term “client”, I assume that you are a financial advisor ( but you might be a broker).
You should understand that you MUST be 100% accurate in this situation.
1. You used $ 3,864 at one place, and $ 3,860 in another place as the monthly payments. Just the small difference of $ 4 could bust the plan if it was just 1 monthly payment, but $ 4 x 4 months ( Sept-Dec) is $ 16 for 2011, and would definitely bust the
2. $ 3,864 x 4 months (Sept-Dec) = $ 15,456 NOT $ 20,000. In the 25% tax bracket, the tax would be $ 3,864 which is 1 month’s distribution.
3. As an “advisor” you should have known that you could make distributions “in kind” if there was inadequate cash in the IRA.
4. I think that you stated that the investment should/might be ok sometime next year. If so, then the distributions for the shares you transferred “in kind” could provide the cash to pay the taxes next April ( or extended to October 2012), or those shares
could be able to be sold in the non-IRA account for paying the taxes next year.
2011-12-15 20:30, By: dlzallestaxes, IP: [22.214.171.124]
L10: Ending the plan
As I previously said, I am an investment advisor; I am fee only.
1. As I’ve mentioned I am being general here, (i.e. $20,000), and I have pledged to make my numbers exact to within 50 cents.
2. As I’ve mentioned I am being general here. I can and will multiply the amount we’ve taken by the months she’s missed, so it is exact to the previous years of distributions as verified on her 1099s. I’ve already contacted Schwab and gotten their amount
distributed to date. (See, I didn’t even need to multiply!)
3. Yes, I did know that I could transfer in kind shares. That is why I mentioned doing it. I don’t like my client having to pay taxes on money she doesn’t really get. She already has a hardship by having the investment end prematurely. If there is a way
to use a hardship with no risk, then I wanted to know about it. I was actually told about it by a nationally known source, but I wanted further verification.
4. We’ll see. I don’t want to make plans now on potential changes in the future, especially with such a short time to make that much improvement in the market. Real Estate usually doesn’t come back that fast. We aren’t expecting that now. The client has
to prepare to pay out of her short term savings and/or other investments.
Thank you all for your good advice and judgment on this.
2011-12-16 00:26, By: Jayne, IP: [126.96.36.199]
L11: Ending the plan
I have no idea where the source came up with the hardship idea, but there is no such feature in conjunction with a 72t plan.
Probably the closest situation to that is that total disability or death will result in immediate termination of the plan without further obligation. But the only way to reduce distributions is either through a recalculated plan
that originally starts as such, or the one time switch to the RMD method. With over 30k distributed through August, and no possibility of rolling back funds distributed within the past 60 days, the client has already far surpassed the RMD calculation for 2011
unless the 12/31/2010 value of these shares is several times more than what they are worth now.
So the distribution of the correct number of shares looks like the only workable option. The value of these shares on the date of distribution will be the cost basis for them in the taxable account.
2011-12-16 00:39, By: Alan S., IP: [188.8.131.52]
L12: Ending the plan
Wow, Alan you make that so clear.
I’ll have it done ASAP. At least she doesn’t have to distribute until June at the 59 1/2 mark. It’s something more than I thought as worst case scenario.
When the recalculation opportunity came out I tried to get herto do that, as I tried to get her to take less originally. I finally got her to save a thousand a month after taxes for a contingency other than her otherassets. She will have to pay taxes
out of that. The investmentshould becomewhole within a few years; it has paid out over 70% of initial investment in earningsover the years.
As for my source, he was very kind to write me back on it in detail. He hasn’t reviewed this strategy in his writingsbefore, though. I’ll keep him private, as I’ve potentially misrepresented his views and he didn’tvolunteer to be laid bare in helping
Thanks again. I’ve purchased the book with this site. I only have one other person I’ve set up with this strategy, her sister. Is there an obvious resource I’ve missed?
You guys are great.
2011-12-16 16:48, By: Jayne, IP: [184.108.40.206]
L13: Ending the plan
I’m confused. You stated that “The investmentshould becomewhole within a few years; it has paid out over 70% of initial investment in earningsover the years.”
Are you really saying that she has received 70% of her initial investment in EARNINGS, and therefore still has 100% of her initial investment left, which would be a fantastic deal ?
Or did she get back 70% OF her original investment back, which is really a return of her investment, not a return ON her investment, i.e. earnings, and has 30% left ?
Without specific figures, it is difficult to figure out if this was a good investment or not. If she invested $ 100,000 and received distributions of $ 70,000, and the remaining investment is worth $ 30,000 then she has not earned anything, and has merely
gotten her money back. This would be analagous to getting a refund from the IRS for over-withholding or over-estimating on your taxes, which would be essentially an interest-free loan to the government. ( But some taxpayers consider it to be forced savings,
and use it to pay for vacations.)
2011-12-16 18:16, By: dlzallestaxes, IP: [220.127.116.11]
L13: Ending the plan
I too am an investment advisor and have processed the “shares in-kind” method for RMD distributions for several clients. The key is to do it early!
If you have never done this before,you need to know that time is really short. The shares have to be “re-registered” and the paperwork is not necessarily simple. And the custodians get real busy at this time of year and may not be very helpful or understanding
to your plight.
Good luck and Merry Christmas.
2011-12-16 18:48, By: Jim F, IP: [18.104.22.168]
L14: Ending the plan
I know! I’ve already ran through this months ago, but when I was told about the recalculation I set it aside. They didn’t even mention that it was an annual Jan-Dec time frame.
I’m on it! Thanks so much.
2011-12-16 19:12, By: jjayne, IP: [22.214.171.124]