L1: MD methodFirst, Thank You for this website and all information.I would like to ask for clarification that I am doing this correctly.Turned 55 April 2010. Trad. IRA with Vanguard.Will useMD method for 5 years. I would like to start this July 2010, using Dec. 31, 2009 final Trad. IRA amount, and life expect. 29.6. Calculation is easy, will take the whole amount for 2010. Recal. January 2011 using Dec. 31, 2010 balance and new life expect calculaton. Take full distribution January. Each January, continue recalcuating (like above), until and including Jan. 2014. On Jan. 2015, I will stop MD method and not take any amount under 72t rule. Vanguard does not code 1099R as a 2 so I will have to do a 5329 yearly. Doing this myself, hoping MD method is not only easier, amount I need, and less chance of audit?? Also, when ending MD method, any thing special I would need to do?Any suggestions, problems in my idea?Again, Thank You.2010-06-21 14:02, By: cak, IP: [126.96.36.199]
L2: MD methodJust my opinion, but the MD method is actually more complicated than the other two methods and because of the annual re-calculation it could also lead to more errors.
In addition, it would be no less subject to an audit than the other two methods and since it would show a distribution that would change annually, it could be more subject to an audit.
The advantage to the amortization method is that it results in the greatest distribution and requires the least amount of the total IRA account. The amount, once calculated, remains level through the life of the plan – nothing that requires an annual calculation.
Also be sure to check out our Planning Pointers page for a few helpful tips.2010-06-21 14:59, By: Gfw, IP: [188.8.131.52]
L3: MD methodCak,Gordon is right. Once you compute by Amortization method you can choose NO RECALC version, andthen the payoutis thesame amount every year of your SEPP. You should use Gordon’s “reverse calculator” to see how much $$ you need in an IRA to support the AMORT method with your desired annual payment, and then move the rest to a new IRA that is not part of your SEPP plan. It could be with same custodian, but needs to be a different account number, and not linked to the SEPP IRA. Then, if you have an emergency that requires additional $$ from your IRA during the 5 yrs of the SEPP plan, you can make a withdrawal from other IRA and only pay the penalty on that withdrawal, while not putting your SEPP plan in danger of being “busted” for an extra withdrawal. By starting with AMORT method, you also have the option of lowering future yearly payments if that is every an option you wanted, by making one time switch to MD method, and then you would follow the annual MD recalcs you described once you made that switch. It gives you a lot more flexibility, and is a much better way to go.I also believe that monthly payments are a much better way to manage SEPP withdrawals. It is not easy to budget one check to last twelve months without running out a bit shy of when the next one is due.KEN2010-06-21 16:29, By: Ken, IP: [184.108.40.206]
L4: MD methodThank you Gordon and Ken. Both gave great advice and I understand all you told me. Was hoping thatdoing theMD method, I could handle without a tax advisor. Using this website and Vanguard advise is very helpful. Doing the AMORT method, I can again use this website and Vanguard but discussion forums leave me feeling insecure in trusting myself. However, if I chose to change to AMORT method, would I be correct in I can pick a balance from Trad. IRA between Jan. and July 2010 for a July distribution? And, If I used May’s 120% mid-term rate for July, can I use this for a distribution for any date in July? (I would like it to be around July5th – 10th but time is getting short if you suggestion I need outside help. Thanks!2010-06-21 20:05, By: Cak, IP: [220.127.116.11]
L5: MD methodI would suggest planning for your initial distribution later in July. Time is too short to chance trying to finalize anything sooner, especially with the July 4 holiday. If you MUST get monies sooner than July 15-20, you could start to take your 2010 distribution for less than 50% of your calculated annual distribution. Once you finalize the paperwork, and the IRA balance that you are using, you could take the additional distributions in an amount that brings your total distributions for 2010 to EITHER 100% or 50% ( 6/12) of the annual distribution total you calculated. You should do tax planning to decide whether to take 50% or 100% in 2010.2010-06-21 20:58, By: dlzallestaxes, IP: [18.104.22.168]
L5: MD methodIf you understand the rules and regulations of starting and maintaining a 72t, you CAN probably do this yourself. If not, it could be very costly if an error is made.
After reading and following this forum for quite some time, I set up my own SEPP Plan 4.5 years ago. I did as KEN had suggested in his response to you. Using the reverse calculator, I arrived at an amount that would be needed to fund my SEPP IRA account. I then separated my original Rollover IRA in two (2) separately-identifiable accounts (Also with Vanguard), one to cover my SEPP payments and the remainder was left in the other account if needed for an emergency (which hasn’t been necessary as yet) .
Also, after 3 years I did make the one time switch to the MD method because I no longer needed as much from the IRA since my husband found a small part-time job. This is one instance where the flexibility to make the one time change to MD comes into play.
I suggest you start by figuring out how much you will need for the next 5 years and use the reverse calculator to determine how much you need to put into the SEPP IRA Account. Transfer that exact amount to a NEW account# and use that as your starting balance. As Ken stated if things change down the road and you don’t need that much, you can always change to the MD method. Remember by starting out with the MD method you cannot make a change to one of the other methods. Also, there’s a chance you could get less in subsequent years lower balance and/or lower interest rates at the time of recalculation.
My SEPP is set up with Vanguard and was set up in less than 10 days. I transferred the money on1/4 and made first withdrawal 1/13 so I think this can be accomplished in your time-frame, but please do your homework before setting this up.
One other note on your original post. You said you would STOP January 2015 and NOT take ANY amount under 72t rule. That is probably okay to take nothing, but I don’t think you can take just any amount between Jan. 2015 and your ending date which would be sometime in July 2015 even though you will be over 59.5 at that point, but that later of 59.5 or 5 years has not ended until July, 2015. I would hate to see your plan busted because you made an unauthorized withdrawal after 59.5 but before your end date. Others can comment on this and give you specifics about withdrawals in your final year.
Whatever you decide KEEP GOOD RECORDS.2010-06-21 22:36, By: meb24, IP: [22.214.171.124]
L6: MD methodMeb is correct. You would probably re visit your options for 2015 in about 4 years.But if you take out your full annual SEPP distribution for 2010, you will have withdrawn 60 months worth by the end of 2014. That will allow you to take out nothing, take out 6 months worth, or take out the full annual amount prior to the plan modification date in 2015. You cannot take out some other amount than one of those 3 options.Now for a moment, let’s assume you decide to limit your 2010 distribution to 6 months with the July starting date. In that case, you will NOT have the option of taking nothing in the first half of 2015, because you must take out at least 60 months worth as a minimum. You could either do that or take out the full annual amount.AFTER the modification date in July, 2015 you can do whatever you wish since your SEPP plan will have ended.As indicated above, I would re visit this again late in 2014 to see if the IRS has issued any unexpected rulingsthat wouldaffect these options.2010-06-22 00:23, By: Alan S., IP: [126.96.36.199]
L7: MD methodI am revisiting the mentioned ideas from everyone. Could someone please verify these ideas. Take an annual in July 2010. Using May’s 3.45%. (Can I receive any date in July up to last day and still use May?). Balance I believe can be any balance between Jan.-June 2010. If using all of Trad. IRA (Need this confirmed). Take the full year of 2010 in July instead of half. (Please confirm this is alright.). For following 4 years, does distribution have to be July date? I do have emergency money and budgeting not a hard for me.I havea fan of thissight for years, also talked with IRS and Vanguard, just would appreciate clarification of above 4 questions and advice if I am missing something. Thanks again Gordon, Ken, Meb and Alan.2010-06-23 19:03, By: Cak, IP: [188.8.131.52]
L8: MD methodCak,1) With respect to your July receipt date, you need to focus on the actual distribution rate rather than you date of receipt. The time lag between distribution and receipt varies from nothing to perhaps 10 days depending on your IRA custodian and distribution procedures elected. The distribution must not be done later than 7/31 to qualify for the May interest rate.2) While not totally clear, the reference to 6 months prior applied to the MD method, and a July date even exceeds that. I would not go back farther than 3/31 and an April date would generally provide even a higher account balance than 12/31/2009.3) Full year or 50% of full year are both OK. One way to increase your flexibility would be to take out 50% or less in July, and make your final decision in early December whether to bring your total up to the full annual or not.4) In the following years, the timing of your distributions does not matter, although it is safer to backload them than to take out most of the amount early in the year. There is no distribution pattern that is not allowed. Just taking out the exact annual distribution by 12/31 is critical. If you set up automatic distributions, use a date early in each month as it will give you time to correct errors in December.5) Remember that with Vanguard you will need to file a 5329 each year to claim your 72t exception (Code 02).2010-06-24 00:01, By: Alan S., IP: [184.108.40.206]
L9: MD methodALAN’S ANSWER # 3 IS EXCELLENT. # 5 IS NO BIG PROBLEM FOR TAXPAYERS OR PREPARERS TO BE CONCERNED ABOUT.2010-06-24 01:08, By: dlzallestaxes, IP: [220.127.116.11]