L1: Independent paymentsI read the article on ‘Deposits After Establishing the 72(t)’, but there’s a couple of things I don’t quite get.
If payments into or out of a SEPP designated IRA are independent of the SEPP payment if it is substantially different than the required SEPP payment, does this mean amounts may be withdrawn or deposited to the SEPP IRA with impunity during the withdrawal period?
Thanks2016-06-23 22:39, By: BruceM, IP: [188.8.131.52]
L2: Independent paymentsNo. Once the SEPP IRA is established, no additional funds may be deposited to that account and the only amount distributed annually from that account is the calculated SEPP payment – no more and no less. 2016-06-23 22:59, By: Gfw, IP: [184.108.40.206]
L3: Independent paymentsok, that’s how I’ve always understood the rules.
From the mentioned article…
“…if the payment is substantially larger or smaller than the other payments in the series. An independent payment is an eligible rollover distribution if it is not otherwise excepted from the definition of eligible rollover distribution.”
So how is the independent payment treated?
1. It ‘busts’ the entire SEPP plan, with 10% due on all past taxable distributions plus interest?
2. The independent payment is includable as ordinary income and a 10% penalty is assessed on it but the SEPP plan is left intact?
3. If the independent payment is rolled back into the SEPP plan, there is no change?
4. If the independent payment is rolled into something else, the SEPP plan is ‘busted’?
BruceM2016-06-24 16:53, By: BruceM, IP: [220.127.116.11]
L4: Independent paymentsIt is a payment – in or out of the SEPP – that is not part of the calculated SEPP Payment. I can’t really clarify any more than was stated in my previous answer to your initial post.2016-06-24 17:00, By: Gfw, IP: [18.104.22.168]
L5: Independent paymentsYes, that it is an independent payment is not the question. What effect does this independent payment have on the SEPP?2016-06-24 22:48, By: BruceM, IP: [22.214.171.124]
L6: Independent paymentsBUST!!!I think you should consult a consultant or planner that can clarify for you further.2016-06-25 00:00, By: Gfw, IP: [126.96.36.199]
L6: Independent paymentsIf you have Bill Stecker’s 2004 review of SEPP plans, p 105 discusses so called “trailer money” that has been rolled into an IRA. At that time, he indicated that the IRS had not anticipated or addressed trailer money. It has been standard practice that if small amounts are paid for various reasons into a qualified plan after the direct IRA rollover, the plan will routinely roll that money into the same employee’s IRA account that received the initial rollover. Bill suggests that if this occurs, consider treating this money as IRA earnings and not a contribution, but if this occurs in a different calendar year from the initial rollover, the 5498 issued by the IRA custodian could cause some problems. It is very possible that there has been a PLR since 2004 on this subject, but I am not aware of one.
The article posted here that Bruce refers to includes a portion of IRS Reg 1.402(c)(2). Q 6 of this Reg addressing independent payments unfortunately only applies to qualified plans, not to IRAs. The vast majority of SEPPs are IRA SEPPs, and there is less risk and more control of SEPPs taken from an IRA. The IRS Reg states some examples of payments from qualified plans that can be considered independent and would not bust a qualified plan SEPP, but again this does not apply to IRA SEPPs, so if such a payment is contributed to an IRA SEPP, it is likely a modification and will technically bust the plan unless the IRS accepts the source of the money and allows the plan to continue.
For this reason, I suggest that if you do a direct rollover shortly after leaving employment when various 401k adjustments might still be pending, transfer the money from the receiving rollover IRA to a new IRA and initiate the SEPP from the new IRA account. Keep the original IRA account open for at least a year.That way, if there is a trailer payment it will go to the original rollover IRA and not to the SEPP IRA.2016-06-25 18:10, By: Alan S, IP: [188.8.131.52]