interest rate

L1: interest rate I have a new client that set up his own SEPP in 2002 apparently with no guidance from the custodian. At the time, he figured that as long as he was taking an amount calculated using an interest rate lower than 120% of the federal mid-term rate, thatwas ok. Although I believe that is the case, I think there is a problem. In double checking his figures,even using a 0% interest rate, the calculator still results in an amount greater than what he has been taking. Of course, what would have made the most sense back then would have been to split the IRA for more flexibility but he didn”t. His payment modification date is in mid July 2007 so lack of flexibility hasn”t created a problem to date. The question is “how low can the annual payment be without causing a problem”? In this case, the interest rate would have had to have been less than0%. Any insight would be appreciated.2007-01-23 16:41, By: can, IP: [74.93.198.10]
L2: interest rateMr Badger, will you please respond to this?
I seem to remember you posting some time ago that it was possible and permissible to use a negative interest rate to calculate the distribution amount. Was this a fact or justdemonstrating a point in that case that the person doing the SEPP had really goofed? And, do I have my facts correct about your post?
Jim2007-01-24 07:08, By: Jim, IP: [70.184.2.72]

L2: interest rateSounds like the calculation was simply done wrong.If the annual amount distributed does not coincide with the calculation (using avalid interest rate), then it is wrong.
2007-01-24 07:08, By: GRT, IP: [24.145.246.83]

L2: interest rateThanks for the responses. How low can the interest rate be to be considered a valid rate?2007-01-24 09:48, By: can, IP: [69.250.160.85]

L2: interest rate
I agree with GRT – probably wrong from day 1 – I also don”t believe that a negative rate would be considered reasonable even though it would be less than the 120% rate. If I were the IRS in an audit, I would simply try and make your client justify the plan which he/she probably couldn”t do.2007-01-24 10:16, By: Gfw, IP: [74.136.109.63]

L2: interest rateThe calculator found on this site does not allow negative interest rates to be used in the calculation.
And after thinking about the process I think I understand that if 0 (zero) is used for the interest rate what is basically being done is calculating a distribution that would be deplete the fundat the end of the life expectancy predicted by the mortality table (assuming the fund truly has no growth.)2007-01-24 11:12, By: John, IP: [71.208.232.16]

L2: interest rateHello can:
Sometimes one has to read the law literally; in this case RR 2002-62 says: “the interest rate that may be used is any interest rate that is not more than 120% of the federal mid-term rate……”.
Thus, I find negative interest rates to be illogical & likely a poor allocation of resources for all of the obvious reasons. That said, a negative interest rate will always satisfy the above test or rule; therefore it must be okay. The IRS, in drafting RR 2002-62 had ample opportunity to say everything and anything they wanted to with respect to interest rate selection & decided on the above. They could have said the interest rate must be between X% and Y% but chose not to.
Furthermore, my guess is that there are 100 places in the IRC that use applicable federal rates of varying kinds. Many of them say that the taxpayer will use rate X or rate Y & in those cases then the rate is effectively stipulated & the taxpayer is in error should they use a different rate including one that is “less than”. In our case, the interest rate test is clearly a one-sided or “right hand” test that says use any rate that is to the “left of” or less than a published rate.
TheBadger
wjstecker@wispertel.net
2007-01-24 15:58, By: TheBadger, IP: [72.42.66.174]

L2: interest rateHi Badger,
Thanks for the detailed response. I don”t think he actually set out to use a negative interest rate.From what I understand from him, he calculated the amount using120% of the Federal Mid-term rate and believed that he could take any amount that was less than that as long as he took the same amount every year for the required period of time, which he has.I was concerned because of the usage of “reasonable” in the code.
Thanks again for responding.
2007-01-24 19:17, By: can, IP: [69.250.160.85]

L2: interest rateHe is 4 years into his SEPP, taking variable amounts each year, and still no IRS inquiry? Has he been getting an exception code on his 1099R or is he claiming it on Form 5329?
This is useful in determining IRS” degree of vigilence regarding 72t red flags.
While there is some freedom to reconstruct by looking for rules that comply and backing into them, those opportunities are usually limited to the first year, whereas here the pattern could only comply if taxpayer was allowed to recalculate every year using wildly varying rates. Even the recalc methodology justified in 2002-62 would limit interest rate application to some uniform % of the 120% rate to my way of thinking, making this plan a bust.
That brings this client to the issue of reporting which year the 72t was busted, and if and when a new plan was initiated. If the bust is reported in 04 on an amended 5329, can 05 and 06 fit under the rules for a new plan? Probably not, then if the bust is reported for 05, does the 06 calculation make any sense in relation to 5 more years of use? And, if he is or will be 59.5 very soon, does it make sense to even start a new plan?
In other words, an interesting case study on minimum cost 72t demolition and reconstruction:), and how best to steer the client going forward.2007-01-25 11:10, By: Alan S., IP: [24.116.66.98]

L2: interest rateHe has actually been taking the same exact amount every year in the form of an automatic withdraw from his custodian monthly. That is probablywhy this hasn”t come under scrutiny by the IRS. The custodian knows this was established as a SEPP and provides an exemption code.2007-01-25 11:34, By: can, IP: [69.250.160.85]

L2: interest rateOK. Well, the calculator result could be reduced somewhat if he went from individual to joint calculations. Any chance he used individual? If he did, changing to joint might eliminate the need to bring a negative rate into play. That”s the only variable left to test out.2007-01-26 17:07, By: Alan S., IP: [24.116.66.98]

L2: interest rateNo, unfortunately, I”ve tried every possibility and the only thing that brings it down to what he is taking would be a negative interest rate. I know the calculators don”t allow for it but 0% is still too high so……2007-01-27 10:42, By: can, IP: [69.250.160.85]