L1: General infoI am 43 with 23 years of service in a state pension. I had planned for a 30 year career with the last 5 in a DROP. That’s not realistic anymore. At 25 years of service I will have 1.500,000 roughly. I intend on doing the unthinkable by cashing out 500,000 and paying the taxes and penalty. having 1,000,000 left to invest. I have questions regarding terminology used on the SEPP calculator. The term ‘Busted” should be straightforward enough but I don’t understand it’s meaning in the context of the SEPP calculator.2010-08-12 18:20, By: Ltfm161, IP: [184.108.40.206]
L2: General infoOne of the calculators shows the cost of a busted plan, ie a plan which was invalid to begin with or one that was busted due to incorrect management or simply because you ran short of money and took out more than the plan specifies. The cost to bust is immaterial if you set up and manage your plan accurately.
When you bust a plan, you will owe the 10% penalty on all dollars you already took out penalty free because of the plan back to day 1. This amount is added up and the IRS will levy an interest charge on the penalty for each year, so the interest will accumulate if you bust a plan in the later years of the plan. The calculator uses a 4% interest rate for illustrative purposes, but since 4% is the lowest the rates have been for several years, the total interest charges would likely be higher than the calculator shows.
That said, I don’t know why you would not just roll your lump sum over to an IRA and avoid all that current tax liability and penalty. Also, setting up a SEPP at 43 creates a very long 16 year duration. For those under 50, you should probably plan on partitioning your IRAs into two or more accounts, setting up a basic SEPP using one of them, and using the others for emergency needs or to set up a separate and independent SEPP later on. That would help you keep more of your options open. 2010-08-12 18:36, By: Alan S., IP: [220.127.116.11]
L3: General infoCLARIFICATION In Alan’s response, I think he meant to say that if you ran short of money IN ANY YEAR, and took out more than the exact annual amount FOR THE YEAR, then you would bust the plan, and have all of the dire consequences of the RETROACTIVE 10% PENALTY.
Howevr, if because of poor investment performance the plan ran out of money before the terminal date, then there is no 10% penalty. But your “penalty” would have been even worse than 10% because of all the money you would have lost in your investments.2010-08-12 19:15, By: dlzallestaxes, IP: [18.104.22.168]