L1: Interest rate?Please explain how the estimated 120% Interest Rates plays into the SEPP equation? I am 55 and retired. I have 400K inself directedIRA. I need $1500 a month additional income. Can I use my IRA account to buy CDs and other safe investment instruments that yield 5% to give me the $1500 a month?2009-03-05 01:07, By: 72t Newbee, IP: [220.127.116.11]
L2: Interest rate?
The interest rate comes into play in the 72t calculations for the annuitization and amortization calculation methods. The Federal Reserve Mid-term rate is used in those two calculation methods. You must use what the IRS terms “a reasonable interest rate” and they define what is reasonable as no more than 120% of the Fed Mid Term rate. You can use less than this rate if you choose but no more than this.
Use the calculators on this web site to determine what your annual 72t payment will be. You can elect to receive this at any desired interval as long as it is at least annually. Most 72t plan owners use a monthly or quarterly payment schedule.
CDs are a valid investment instrument for IRAs and you can own them in an IRA. Just make sure that you do not have all of these at one institution such that they are not all covered by FDIC insurance. Finding CDs that pay 5% could be a challenge given how low the interest rates are these days.
You will also want to set up a money market fund in your 72t plan IRA with sufficient cash to make 3-4 months worth of payments. Set up the CDs so that when they pay interest, it goes into this money market fund. Make sure that all of your 72t distributions come from the money market fund. By doing this, you can ensure that there is sufficient cash available to make your monthly or quarterly payments and you never need to sell a CD prematurely to make your distribution payments. Once you know what amount your payments will be and the fequency / amount of interest paid on your CDs, you can decide how much cash cushion you need to make this work.
2009-03-05 05:08, By: Ed_B, IP: [18.104.22.168]
L2: Interest rate?Newbee,
Try the reverse calculator on this site, and enter the age you will attain in 2009.. it may be 56?? There you can use the current 2.48% maxrate that will work if first payment is made to you on the new SEPP plan in March, or you can run it again, using 2.33% max (you will have to change it in calculator) that will be allowed for April or May 2009 first payments. It is the REASONABLE RATE were you enter that % value. The other rate is how much you expect your portfolio to grow from investments, just so it can predict future yr ending balances. Also, use single life, and when done calculating, jot down each result (in terms of needed starting balace) for AMORT (which yields the highest payment) or ANNUITIZATION. I got a needed starting IRA balance of (I will round off here, but you can’t)-for age 55 in 2009of $374K+ and $375K+ repsectively for the AMORT vs. ANNUIT plans if you want to get $1500 per month paid out, or $18K per year. If your age this year will be 56, I get $366K+ and $368K+ respectively for starting balance. This means you can move the balance (appx $25K-34K depending on choice) to another IRA, and that can be tapped if an emergency with only a 10% penalty on that withdrawal, and won’t disturb (or “bust”) your SEPP (72t) plan.If you invest in CD’s make sure there is enough cash to support the payments until a stream of interest payments or principal on mature CD(s) is sufficient to cover your withdrawals. If that cannot be done, leave one year’s worth (or more) of payments $18K in a money market/cash account, so you don’t run out of cash to cover a payment.You wouldn’t want to cancel a CD and incur a penaltyto get to the principal so a payment can be made.You don’t have all the answers yet, but this might help. KEN2009-03-05 19:58, By: Ken, IP: [22.214.171.124]