L1: Great SiteThis is a fantastic site. I have been studying and rereading everything in this site for the last week. I’m about to start a 72(t) SEPP plan and will shortly provide all the details for feedback and critique. Thank you for this site and all the great questions and answers. It has been a godsend.2011-07-02 17:40, By: Wally, IP: [184.108.40.206]
L2: Great SiteFire away as soon as you are ready. The more basic details you can provide, the better.2011-07-02 17:50, By: Alan S., IP: [220.127.116.11]
L3: DetailsPurpose of 72(t) SEPP: To provide me (unemployed and returning to school for the next two years) and my partner with a monthly household income supplement.
Age: 54 and single
IRA Account Balance: $309,197 (as of May 1, 2011) *Chase is the custodian.
Method Used for SEPP: Fixed Amortization (I am seeking the highest annual/monthly distribution)
Interest Rate Used: 2.98% (120% of May monthly midterm)
Annual Distribution (based on calculator): $15,492
First Distribution: I will commence monthly distributions for the balance of this year (July 10th thru December 10th) in the amount of $2,582 ($15,492/6). Commencing January 10, 2012 I will take monthly distributions of $1,291 ($15,492/12) each subsequent month/year until age 59-1/2.
*If I should desire a future reduction in the annual distribution (I become employed) I will take advantage of the one-time exemption to convert to a RMD.
**I will pay/submit quarterly estimated IRS income tax (15%) and estimated quarterly California state income tax (state residence) as opposed to having the custodian (Chase) withhold and forward to the IRS and California FTB. In addition to a small $207 per month former employer pension distribution this SEPP distribution will be my solesource of income.
***Due to partner’s income, his 401K, and the sizable equity in our home the prospects of busting this plan are remote.
Questions and critiques are welcomed.
Thanks!2011-07-04 00:49, By: Wally, IP: [18.104.22.168]
L4: DetailsIt sounds like you have a good grasp of SEPP 72-T plans.
It appears that you have already determined that the full $ 15,000 for 2011 would be taxed at 15%, and this will give you some additional cushion for the future.2011-07-04 16:05, By: dlzallestaxes, IP: [22.214.171.124]
L5: DetailsEverything sounded in order, but when I checked your interest rate you apparently used the April rate, not the May rate. Fortunately, the May rate only dropped to 2.94 from 2.98, but you need to generate the new numbers and get the distribution made before the end of July. I would try to order it by the 20th since there are two weekends in the final 10 days.
While this may not work for you, if you collect UC for 12 weeks, you would have a penalty exception for your health insurance and you will also have a penalty exception for higher education expenses paid. Since the education expenses can be prepaid to some extent, you might be able to postpone the 72tdue to these other exceptions.Don’t know how long and the amount of your education expenses, but if you stopped the education itwould probably bedue to new employment?You might also want to locate the “Benz decision” on this site, but I would not depend on someone else’s PLR when there is only one such ruling.
On the other hand, interest rates are falling and you will still need to run a plan for the minimum of 5 years, so you might be better off to just recalculate for the slightly lower distribution and start the plan this month.
2011-07-04 17:57, By: Alan S., IP: [126.96.36.199]
L6: DetailsAlan S. – Thank you for taking the time to review and provide follow-up. You are correct regarding the interest rate, I used April and not May’s. I will recalculate at 2.94%. I did consider the education expense exemption (as well as health insurance premium exemption) when readingthe “Benz decision” you referenced but thought it might become too complicated and risky.I’m covered by my partner’s group health insurance plan so the exemption for health insurance premiums is not a necessity.
*Your last sentence accurately summarizes my thought process, “On the other hand, interest rates are falling and you will stillneed to run a plan for the minimum of 5 years, so you might be better off to just recalculate for the slightly lower distribution and start the plan this month.” 2011-07-04 19:19, By: Wally, IP: [188.8.131.52]
L5: Detailsdlzallestaxes- Thank you for taking the time to review my details and provide a follow-up. I do have additional income this year which is the reason for figuring the 15% tax. Commencing 2012 I will calculate my federal and state income tax marginal rate accordingly. Thanks again!2011-07-04 18:56, By: Wally, IP: [184.108.40.206]
L6: DetailsI actually used the correct interest rate of 2.94% in my calculations so my numbers are accurate. When listing the details I erroneously listed the April rate of 2.98% instead of the May rate of 2.94%. My bad.2011-07-04 22:11, By: Wally, IP: [220.127.116.11]
L7: DetailsUnder current tax regulations, health insurance benefits for a non-spousal partner are taxable income. I think they are taxable to your partner, not to you, but double check just to make sure that will not affect your taxable income.
Kudosto your partner’s company for itsopenminded policies.2011-07-05 13:44, By: dlzallestaxes, IP: [18.104.22.168]
The only question I have is the fact you have an even-dollar distribution … no pennies in your calculation! Rarely if ever does this occur. Please re-check your calculations and don’t ignore any odd cents.
Jim F.2011-07-05 16:01, By: Jim F, IP: [22.214.171.124]
L9: DetailsJim F. – Thank you for your review and follow-up. I ran the calculations here which allow for “cents” and I ran the calculations through another highly recommended financial calculator that does not allow “cents.” It forces you to round to the dollar. Running it with the additional $0.47 in this site’s calculator gives me $15,492.06 on an annual basis. The other calculator gives me an exact $15,492 on an annual basis. Since we are dealing with Uncle Sam I’ll use the $15,492.06 annual figure.
*BTW- For anyone interested I called Chase (my IRA custodian) today and I was rather impressed with their understanding and knowledge of 72 (t) SEPP’s. Although, I will say they appeared to be blown away with “my” knowledge. LOL!2011-07-06 00:07, By: Wally, IP: [126.96.36.199]
Thanks for clarifying the exact dollar amount for your annual distribution as $15,492.06. You MAY round down to clear out the $0.06 since yourdistribution will be within $1.00 of the calculated annual amount.
I would go with the even dollar amount of $15,492 annually or $1,291 monthly. This will keep things simple for tracking your receipt of the correct amounts.
2011-07-06 14:40, By: Jim F, IP: [188.8.131.52]
L8: Detailsdlzallestaxes- You are correct. The premiums paid by my partner’s employer are indeed reported as additional income on his W-2. As such, they are subject to income tax. We have both been fortunate over the the last 15 yearsto work for progressive companies where healthcare benefits are offered to domestic partners.2011-07-05 23:58, By: Wally, IP: [184.108.40.206]
L9: DetailsYou may be eligible for the Lifetime Education Tax Credit. If so, you may want to take that into consideration as far as how much you should take as a distribution. Also, I would look at all of the other exceptions to the 10% penalty, such as education, etc. to see if they apply, and are beneficial in your situation.2011-07-06 03:49, By: dlzallestaxes, IP: [220.127.116.11]