L1: Interest Rate
Hello everyone. Great site. In trying to learn the SEPP 72t calculation rules, I see March’s maximum rate is 3.47% however I am wondering if a lower interest rate can be used instead? I would want to come close to a traditional 4% safe withdrawal rate as possible from my IRA and when I use the Amortization calculation, it’s closer to withdrawing a bit over 5% every year. I understand that the mid-term rate changes month to month however I am wondering if you are required to use that exact interest rate?
2019-03-12 14:03, By: Bruce, IP: [18.104.22.168]
L2: Interest Rate
You can use a lower interest rate to reduce your distribution, down to 0 if you want. However, that is not what we recommend. The best approach is to use the reverse calculator to determine what IRA balance you need to generate the annual distribution you need to cover your costs, emergencies, and inflation for the duration of the plan.
Use the max interest rate, and the reverse calculator will tell what IRA balance you need for the distribution amount you need. Then partition your IRA by direct transfer so that the new account holds exactly the balance to generate the desired distribution. The older smaller account will not be part of your plan and therefore can be tapped for any additional needs, but subject to penalty. This provides insurance for your plan by substantially reducing the risks that you would have to bust the plan and incur the retroactive penalty.
2019-03-12 19:54, By: Alan S, IP: [22.214.171.124]
L3: Interest Rate
Thanks Alan. I never looked at it that way but it’s probably better to do it in reverses as you say. With the highest rate, I was worried about running it dry and then being responsible for the 10%. I have always been a subscriber to the William Bengen 4% rule however these days have been leaning more towards 3 – 3.5% as a safe withdrawal rate which is what I was also trying to accomplish with my SEPP 72t withdrawals. I am 53 and loosing my IT job of 18 years in July and have been trying to determine a proper withdrawal amount. With my wife working and providing insurance, I figure I will need $40,000 per year, likely a bit less. When I leave, I will roll over my employer sponsored plan into Vanguard and initiate the SEPP. At this point I like VBIAX which is 60% total stock market and 40% total bond so Based on my age and the calculations, I will need to do the SEPP for 7 years or 6 if I can hold off until next year.
2019-03-12 23:56, By: Bruce, IP: [126.96.36.199]
L4: Interest Rate
Some other tips:
1) No penalty if you actually drain the account, but that is highly unlikely if you stay with diversified investments.
2) If for some reason during the plan you feel comfortable reducing your payout, you can do a one time switch to the RMD method. Assuming a small change of your balance due to investment results, such a switch would normally reduce your payout by 30-40%. The only downside is that you must then do a new calculation every year at the same time to update your account balance, age, and RMD table (usually single life table) divisor.
3) If you are going to partition the account as suggested, recommend first doing the direct rollover of your employer plan to VG, then partitioning the account transferring the account balance for your SEPP IRA account to a newly opened TIRA. The original IRA then remains outside the SEPP and available for supplemental distributions, usually subject to penalty but sometimes will itself qualify for a different penalty exception, eg high medical costs or higher education costs.
4) No matter which month you take your first distribution, the first year you can either pro rate by the month or take out a full annual amount. You do not have to make that final decision until December. If you want to set up monthly automatic distributions, do not set the pay date for the first or last 7 days of the month. That prevents year end snafus. Good luck.
2019-03-13 00:24, By: Alan S, IP: [188.8.131.52]
L5: Interest Rate
Thanks again Alan for the great useful information here.
2019-03-13 01:59, By: Bruce, IP: [184.108.40.206]
L4: Interest Rate
If your 401-K has company stock from employer matches or from investments from your own contributions, and they have appreciated in value, you should ask your HR department for the “cost basis” of those shares. Then research the special NUA (Net Unrealized Appreciation) provisions of the tax code. This could save you thousands in income taxes.
2019-03-13 00:33, By: dlzallestaxes, IP: [220.127.116.11]
L5: Interest Rate
Thanks for that bit of information dlzallestaxes.
2019-03-13 02:02, By: Bruce, IP: [18.104.22.168]