Launch of new plan
L1: Launch of new planHi guys!
I will be launching my 72(t) plan this month. I wanted to run the numbers by you to make sure all looks good.
Spouse DOB: 11/1/1965
SEPP Interest Rate: 2.55%
Date of first distribution: 6/9/2017
First Modification Date: 7/22/2023
Aggregate IRA account balances based on 5/31/2017 Statements: $2,007,821.18
(I have two IRA accounts in this 72(t) universe, and both were created in 2017, so I do not have a 12/31/2016 statement)
Annual distribution: $93,693.74 (Amortization method, and I will not prorate the first year)
I also have other IRAs for emergencies, and my spouse is continuing to work for two more years, and also has a retirement account. My plan is to take this distribution (which is more than my current living expenses when you include my spouses current salary), and build a non-qualified account, to buffer us when my spouse retires early in a couple of years. For the first year of distributions, we will get bumped into a higher tax bracket, because I had some additional income earlier this year, but after that we should be back to “normal”. The accounts are at Charles Schwab. I am thinking that I do not want Schwab to withhold taxes if possible, and to submit estimated taxes quarterly to the IRS. Thoughts?
Thanks for your valuable website!!2017-06-04 17:59, By: NotSoOld, IP: [22.214.171.124]
L2: Launch of new planYou might want to also consider doing ROTH CONVERSIONS after your wife stops working. Also, consider deferring SS benefits until 70.
This process is what I call “PLANNING DURING RETIREMENT”.
Normally we consider this when someone can do it up to the limits of the 15% tax bracket. However, there are even advantages to doing this in the 25% tax bracket, especially with an estate of your size. Eventually, the survivor of you or your wife will be in at least a 25% tax bracket, and probably even higher as a single taxpayer. I you have adult children, they will probably also be in the 25% tax bracket.
By doing ROTH CONVERSIONS even at the 25% rate, all future Income (Interest, Dividends, Capital gain Dividends, and Capital Gains) will be TAX FREE in the ROTH IRA. If they occur within your Traditional IRA (or SEPP IRA), they will ultimately be taxed at 25% or more.
If you have grandchildren, you should consider frontloaded 529 Plans for their college education. You and your wife can each contribute $ 70,000 now, and if appropriate, another $ 70,000 each 5 years from now, for each grandchild’s college education.
If you are healthy, you could consider term-life or even whole life insurance to eventually replace the taxes paid or 529 contributions. Life insurance proceeds are not taxable.2017-06-04 18:15, By: dlzallestaxes, IP: [126.96.36.199]
L3: Launch of new plandlzallestaxes,
Thank you for your comments regarding “Planning During Retirement”. I appreciate it. Just to be sure, do the numbers look accurate? I checked them using several calculators, but just do not want to miss something!
NotSoOld2017-06-05 15:48, By: NotSoOld, IP: [188.8.131.52]
L4: Launch of new plan – 60 Day rolloverI established my 72t this month, as described earlier in this thread, and took my first distribution, but now am having second thoughts regarding the IRA accounts that I am using. They are “robo-adviser” accounts that will rebalance as values shift. My desire it to have a bigger cash bucket that I can control. Please confirm that I can return the distributed funds to the account that they came from within 60 days, using the 60 day rollover rule. I have never done a 60 day rollover. What does this look like on the 1099-R form when you withdraw and return to the same account?
Going forward, I will still have two, maybe three accounts in my universe, with at least one of them being my cash bucket. Thanks for your advise.2017-06-22 13:36, By: NotSoOld, IP: [184.108.40.206]
L5: Launch of new plan – 60 Day rolloverFirst, even though you have never done a 60 day rollover you need to be aware that only one of these can be done over a 12 month period. If you roll this distribution back, you cannot do another such rollover for another year from the distribution date and would lose that flexibility in the event that you received more than the SEPP calculation in error. Second, if you roll the first distribution back you must take another distribution before month end or your interest rate drops to 2.45%.
While the risk is small, the IRS has busted SEPP plans in the past for partial transfers. That means if you have two accounts in the plan now, partitioning to add a third could be risky. It would also require you to do the transfer now and use current dates for your initial balance statements which would make it problematic to get your actual new first distribution done in June. That said, if you really want to do this and Schwab understands the situation, they could probably get it done.
Your 1099R would then be higher than your SEPP calculation because of the rollover, and you would have to report the total 1099 R on line 15a with “rollover” entered next to line 15b. Schwab used to provide the SEPP exception code 2, but may not do so anymore and very few custodians do. So it is not clear if you would get two 1099R forms, one coded 1 for the distribution to be rolled back and the other coded 2 for the SEPP. If you just received a single 1099R coded 1, it could draw IRS attention since it will be more than your calculated amount.
Given all these contingencies, I think I would drop the roll back idea and stick with what you have already done. A SEPP should be kept as simple as possible.2017-06-22 18:34, By: Alan S, IP: [220.127.116.11]
L6: Launch of new plan – 60 Day rolloverThank you Allen for your comments. Still thinking about the situation:
1. The single 60 day rollover per year does add risk, for this year. Understood.
2. If I do perform the return rollover, I plan on taking my first distribution of the “new” plan in July, using calculations based on the 2.45% interest rate, amounting to a lower distribution, but this is not a problem.
3. I plan on having the new account(s) in place, and funded by 6/30/2017, so that we have a clean June month end statement balance for the accounts in the universe. By rolling back the June distribution from the first plan and starting fresh in July – does that reduce the “partial transfer” risk? I do not fully understand partial transfer.
4. Schwab no longer codes 1099Rs with exception codes. I need to work with them on determining if these events will trigger multiple 1099R forms or not, and see if I can direct them to provide multiple forms.
Once again. Thank you for your help.
2017-06-22 20:04, By: NotSoOld, IP: [18.104.22.168]
L7: Launch of new plan – 60 Day rolloverQ 3 – The partial transfer risk is eliminated since it would be done prior to the start of your actual plan with the first July distribution. Partial transfers only present a risk if done after the plan has started. Make sure that the distribution rolled back is included in the account balance on 6/30.
Q 4 – Since the code that applies to all these distributions in the absence of a code 2 will be code 1, the total distributions made will be reported including the new annual SEPP calculation and the distribution you are rolling back. I doubt if you can talk them into providing separate 1099R forms, but while that may be desirable it certainly is not a requirement. Assuming you have no IRA basis (Form 8606), your taxable amount on line 15b should be identical to your new SEPP calculation.2017-06-22 22:11, By: Alan S, IP: [22.214.171.124]