Interest rates for SEPP 72T

L1: Interest rates for SEPP 72THi,

I have a question concerning the new interest rates for the 72T. It seems to me that the max that you can do is approximately 5.3% (120% of AFR), but a fellow advisor is planning on still usining the 8% or 9% from older PLR’s since his client is only 51 and he beleives the rates will rebound by then. I am unsure if this is correct or right for his client.

Any help would be greatly appreciated.

Thanks, Mike2003-08-02 10:42, By: Tradewinds, IP: [127.0.0.1]

L2: Interest rates for SEPP 72THello Tradewinds:
Actually, the highest rate that can be used for a new SEPP plan right now is in the 3.25% to 3.75% range depending on the when initiated and the specific month’s rate selected; remembering that the interest rate cap is 120% of the mid-term AFR for either of the two months preceeding the month of the first distribution.
Admittedly, interest rate have risen in the last 2 – 4 weeks so I suspect that the MT/AFR will rise for September, but not even into the 5% range; more likely the low 4% range at most.
As a result, your 5.3% is out-of-range and 8% to 9% is clearly wrong for several reasons:
1. Any “old” PLR that approved an interestrate is by definition, dead, as all were superceded by revenue ruling 2002-62.
2. PLRs are only valid at the time of issuance to the requesting taxpayer only.
3. Even if those old PLRs could stand up (which they can not), 8% to 9% was reasonable, both definitionally as well as market wise when those PLRs were issued. Conversely, today’s market would not logically support that high of a rate.
Bottom line, if your fellow advisor still uses 8% to9% for a client; he will, in my opinion, have committed a breach of fiduciary duty for which he and your firm will be liable for damages incurred by the client.
TheBadger
wjstecker@wispertel.net

2003-08-02 10:57, By: TheBadger, IP: [127.0.0.1]

L2: Interest rates for SEPP 72TBadger,

I really appreciate the prompt reply.
I am somewhat confused on my choice of rates since if you look at the chart for 120% of Long term for the date of 8-01-2003 it clearly shows 5.24%. But, in your reply you state that the max that I can use right now is 3.75%. So, there lies my confusion.

Thanks, Mike2003-08-02 11:27, By: Tradewinds, IP: [127.0.0.1]

L2: Interest rates for SEPP 72THello Mike:
The interest rate ceiling (think of it as a one-sided right hand test) is now limited to 120% of the mid-term (not long term) applicable federal rate. These rates are 3.68%, 3.06% and 3.25% for June, July and August, 2003, respectively.
TheBadger
wjstecker@wispertel.net
P.S. As an aside, everyone, including me do not dispute the computation of applicable federal rates (the IRS has been computing them the same way for decades); rather, the application of the mid-term rate (by definition 3 – 8 years in maturity) is absurdly low, both now as well as in past periods. Nonetheless, the IRS has drawn a hard line in the sand and has explicitly said (no wiggle room here at all) the maximum is 120% of the mid-term rate. We are all just waiting for a taxpayer, hopefully with a somewhat unique set of circumstances to challenge (via a private letter ruling) the interest rate issue to help reopen that door.
2003-08-02 11:40, By: TheBadger, IP: [127.0.0.1]