Establishing two new SEPP
L1: Establishing two new SEPPHere’s my background: Retired at 50, will turn 53 on July 20, did not realize there was limitations on withdrawing funds so now expect to set up a couple of SEPP’s this year. Wife is already 59 1/2 but has limited IRA funds we can tap.
I have three separate IRA accounts, plan to create two new SEPP plans and leave my remaining IRA untouched (if absolutely necessary, will take monies out of that IRA and pay penalty, but probably not necessary).
Would appreciate advice on the following:
1. Since I turn 59 1/2 in January 2019, I assume I will be required to take eight years of annual payments, which includes an annual amount in 2019? That’s fine with me, just want to make sure I fully understand so I don’t bust the plan. If I chose to take monthly payments, when would I be allowed to stop taking monthly payments? I think my preference would be to take annual payments (just to reduce the potential error of making additional calculations and busting the plan).
2. My understanding is that you can include Roth IRA amounts. Also, my understanding is that my Roth IRA balance can be added to one of the SEPP plans, but that I would not have to determine what portion of the annual payment came from my Roth IRA contribution?
3. A few websites seem to indicate that 401k funds can be included in SEPP plans, my Fideltiy rep says no, so I’m assuming I can’t include such funds?
4. Want to maximize my withdrawals so I used the amortization method. Using your calculator, assuming August 15, 2012 as date of first distribution (for both SEPP), calculations show $25,269.00 annual amount assuming $650,000 beginning balance (made Total value of IRA and Amount to SEPP plan the same dollar value of $650,000). I assume your calculator automatically uses the single life expectancy if no box is checked. Even though my wife is 6+ years older than me, using the joint tables does not seem to help increase the amount, correct?
This is a great website. Any advice you can provide to my specific questions would be greatly appreciated. Thanks2012-07-19 02:30, By: trs, IP: [126.96.36.199]
L2: Establishing two new SEPPTRS,
I saw this earlier, and hoped some of the big guns on the board would respond. I’ve been lurking here, and learning for years. Just took my first distribution myself recently.
I ran your numbers through the calculator, and you are correct. if you choose August as your first distrbution you can take the entire sum, or prorate it for 5 months. After your 7 years are up you can take the full amount, a pro-rated amount, or nothing in the last remaining year. (guys please chime in and correct me if I’m wrong on this last statement).
I suggest you read through the SEPP Planning Pointers found on the home page. There you can link to a sample page that was very helpful for me.
BTW, my Fidelity guy didn’t know much about SEPP’s either. A 401k can be used as defined in Revenue Ruling 2002-62 that is also linked on the home page.
How come you’re not doing it this month and getting the higher rate?2012-07-19 22:15, By: Scott, IP: [188.8.131.52]
L3: Establishing two new SEPPScott… your answer is pretty much right on, it appears that you have done your homework very well.
A 401(k) plan can definitely be used as a SEPP.
While there is some disagreement as to whether to combine the 401(k) assets with IRA assets to determine the initial value, if it were my plan, I would… a) set up a separate SEPP using only the 401(k) assets if the 401(k) plan allows partial withdrawals; or b) move the 401(k) assets to an IRA before establishing the IRA SEPP.2012-07-19 22:55, By: Gfw, IP: [184.108.40.206]
L4: Establishing two new SEPPScott:
This little phrase in GFW’s post is very important and might be lost in the weeds …
“a) set up a separate SEPP using only the 401(k) assets if the 401(k) plan allows partial withdrawals;”
Check with your K-plan administrator AND get a copy of the Plan Document for your own study and reference to determine IF your K-plan will allow periodic / systematic withdrawals. Probably most plans DO NOT allow such withdrawls which negates using the K-plan for your SEPP. If you can’t make these withdrawls then you have no choice but to process an IRA Rollover using trustee-to-trustee transfer procedures (DON’T LET THEM SEND YOU A CHECK PAYABLE TO YOU)to set up a separate IRA for your 72(t) SEPP Plan.
Jim F2012-07-20 13:02, By: Jim F, IP: [220.127.116.11]
L2: Establishing two new SEPPThanks for all of the replies.
Regarding my initial four questions:
1. Appreciate the response Scott, I’m sure you’re right regarding the flexibility of having to take a payment in 2019, and even if I wouldbe required to take the total annual amount in 2019 (calculator indicates so), that’s no problem for me.Ijust want to make sure the payments are done correctly. Note:for some reason, I’m unable to open the “First Payment Modification Date” on this website, which is supposed to help answer this question.
2. I’m not going to include Roth IRA amounts, they are relatively minor so the question is moot.
3. Thanks GFW, I thoughtI read somewherethat 401K funds could be included, just gives me some additional flexibility. My 401k plan does allow a limited number of partial withdrawals each year, but if I were to use such funds for a 72t, I would probably convert to a rollover IRA.
4. When I wrote my initial note on July 19, I did not realize that one could change the annual interest rate if one used theamortization method.I think that’s correct, right? One of the reasons why I’msetting up a72tis so I have additional annual income so I can qualify for ahome mortgage loan (yes, my IRA/401k asset amounts get me qualified for zilch because I’m not 59 1/2 yet). Tomorrow I’m going to ask my mortgage company if it matters whether it affects my mortgage loan amountif there is an annual recalculation of the interest rate.In answer to your question, Scott, I used August rate because I did not think I would get all of the paperwork completed this month.
I have one additional question. If my initial distribution is August 15, 2012, does it matter what month/day when the 2013 (and later years) distributions are made? In other words, does it always have to be August 15 (unless on a weekend/holiday, I guess), or do I just have to ensure that it happens sometime within that year?
Thanks for everyone’s help and appreciate any additional responses.
2012-07-22 22:38, By: trs, IP: [18.104.22.168]
L3: Establishing two new SEPPRegarding your last question, it makes no difference – it just has to be sometime between 1/1 and 12/31.
>>not realize that one could change the annual interest rate if one used theamortization
Only allowed if you use a recalculation method which means that you must recalculate based on attained age, previous 12/31 balance and revised interest rate. You can’t just change the interest rate. Check out this link http://72t.net/Articles/ArticleShow.aspx?WA=80102b87-c02e-4b0a-9296-6b42bd2a56a6
Alan… you were right – I meant can’t and edited the post.2012-07-22 23:44, By: Gfw, IP: [22.214.171.124]
L3: Establishing two new SEPPObviously, gfw meant to indicate that you CAN”T just change the interest rate by itself. If you opt to undertake a recalculated amortization method plan, you must change all the components each year.
1) If your Roth IRA balance is minor, best to leave it out of your plan. In a pinch if you needed extra money in some year, your Roth IRA distributions would probably be tax and penalty free (except for earnings and they come out last).
2) While you will probably have several options for 2019 before your plan modification date, this is 7 years out and since the IRS occasionally come out with some strange decisions on SEPP plans, I would check back on this issue in 2018.
3) Yes, best to roll your 401k plan to an IRA if you need to include that balance in the current plan or if you want to start a second plan later on. It is better not to use a 401k for a SEPP if you can avoid it and certainly better not to become a test case to determine if you can combine a 401k and IRA balance in the same plan.2012-07-23 00:11, By: Alan S., IP: [126.96.36.199]
L3: Establishing two new SEPPHopefully these are my final questions and then prepared to submit paperwork to brokerage firms.
1. Just turned 53 this month, believe that my single life expectancy is 31.4 years. However, when I tried to set up a spreadsheet using the numbers listed above, I “run out” of money a bit before the 31.4 years. I think I am doing the calculations correctly because I match the website’s calculations for the first several years. But maybe I am misunderstanding the calculation – if anyone has the mathematical formula, I would appreciate it. Ithink the point is to determine the annual amount thatyou would pay yourself each year for 31.4 years until you run out of money.
2. This website calculator assumes that the second (and following) years distributions are made on the first of the year (I’m assuming this because of the interest rate calculations), but I’mplanning on taking such distributions August 15 of each year – does this make a difference (I assume not).
Again, appreciate anyone’s input.
2012-07-26 17:52, By: trs, IP: [188.8.131.52]
L4: Establishing two new SEPPThe formula is simple… (Previous Year End Balance – Planned SEPP Withdrawal) * (1+InterestRate) = Year End Balance.
(390988-15205)*(1.04) = 15031.32
Changing the timing of interest crediting or withdrawals will have an impact on future values – the further in the future, the bigger the impact.
>>Ithink the point is to determine the annual amount thatyou would >>pay yourself each year for 31.4 years until you run out of money.
Unless you have a CD that guarantees the interest for 31.4 years, any calculation of future values is somewhat meaningless. If you take the payment 2 days early or two days late, even a CD with a guaranteed interest rate for 31.4 years won’t produce exact results. In addition, the plan is designed to stop when you turn 59.52012-07-26 19:20, By: Gfw, IP: [184.108.40.206]
L5: Establishing two new SEPPGfw and Alan – Thanks for the response, sorry, but I worded my question poorly. I was trying to replicate how the annual distribution amount (in my case $25,269) was determined. I thought I understood the formula: pay yourself an annual amount until your balance goes to zero (in my example, for 31.4 years assuming the 1.28% August 2012 interest rate), but I seem to “run out” of funds just before the 31.4 years. If the formula on how to determine the annual distribution amount is available, would appreciate it.
Regarding using a tax/financial advisor, appreciate the advice, but my understanding is that if they make a mistake you are still on the hook for the penalties/interest so I’m just trying to understand as much as possible.2012-07-26 20:37, By: trs, IP: [220.127.116.11]
L6: Establishing two new SEPPUse Excel or most any other spread sheet and do an amortization with the payment at the end of the year based on 1.28% and 31.4 years.
It’s not magic, but I also don’t teach math. The calculated payment has nothing to do with actual investment experience that I demonstrated earlier. 2012-07-26 20:48, By: Gfw, IP: [18.104.22.168]
L4: Establishing two new SEPPgfw put together these calculators, so we would be the one to answer any technical questions regarding the components.
That said, almost no one continues the same distributions after their plan modification date, even though they could for awhile if they wanted to. At some point in your late 70s your RMD requirement could force you to take out more than your SEPP payment if your investment return was enough to offset the distributions you took each year.
In theory, with today’s record low interest rates your plan will produce a lower annual distribution per dollar of IRA balance, so you need a lower investment return to keep your IRA balance about even. That’s fine in the short run since poor economic conditions give rise to the low rates as well as the expected lower returns. But your rate is locked in, so once economic conditions and the markets improve, you will have a better chance to increase your IRA value each year even with the distributions.
My impression of the calculator’s benefits is that you can use different investment returns to determine what you will have left when the plan ends if you attain those returns. But stretching the results out for 3 decades becomes just a theoretical exercise more than anything. You will obviously have major changes over that period including filing for SS benefits, working vrs partial or full retirement, health issues, etc. But if you came very close to the 31.4 years, it must mean that your assumed rate of return closely offset distributions.
2012-07-26 19:35, By: Alan S., IP: [22.214.171.124]
L5: Establishing two new SEPPIf you were able to retire early, and have $ 650,000, you should be able to afford professional advice from a qualified tax practitioner or financial planner who is experienced in dealing with SEPP 72T and retirement planning.
I know how to use a hammer and screw driver, but I would not try to build a house. You may be ok preparing your tax return, but retirement (and estate) planning require specialized expertise.2012-07-26 20:00, By: dlzallestaxes, IP: [126.96.36.199]