Mid term rate

L1: Mid term rate
Hello, If you have a 72 t and your rate is 5.28 and you get 6.75 return at the end of the year on your money what happen to the money.? Are you busted? Does the money stay in the account? Thanks
2007-10-29 18:21, By: Lou, IP: [67.180.189.98]

L2: Mid term rateWhat you earn has nothing really to do with the SEPP. If earnings are greater than 5.28 (using your example) then you will have more money in your plan than you anticipated. If you earn less, then you have less.
Regardless of the actual rate earned, you merely live with the assumptions that were used to create the plan.
Hope this helps.2007-10-29 19:27, By: Gfw, IP: [24.148.16.150]

L2: Mid term rateAssumeyou set up your SEPP 72-T with an amount that will be entirely used up at the end of 5 years or age 59 1/2, whichever is later, assuming a given rate in your calculation. If you earn more than that rate, there will be some extra money remaining at the end. This will be available for an additional distribution at any time after this mandatory period, or if not needed then, can be deferred until starting Required Minimum Distributions at 70 1/2. On the other hand, if your investments earn less than the rate in the calculation, you will run out of money before the end of the required period.
If you put in a “buffer amount” in excess of the reverse calculated SEPP 72-T “investments”, then even if you earn less than the rate in the calculation, you could continue the plan by using amounts from this initial excess.2007-10-30 20:44, By: dlzallestaxes, IP: [141.151.57.101]

L2: Mid term rateThanks for the information Gfw, and dlzllestaxes. What I;m hearing is, for in example,If I start out with 200k as a bufferand 55 year old, I take 24k a year and have 60k left over 5 year. Is this the safe way of doing the sepp plan???? I will keep reading, Thanks2007-10-31 18:11, By: Lou, IP: [67.180.189.98]

L2: Mid term rateSince for all practical purposes, no one is going to set up a 72t much beyond the age of 57, and using the current mortality tablesand single digit interest rates, the only way to drain a 72t IRA is to have sustained negative investment returns. The annual calculation can be limited by using lower rates, but it cannot be increased because there is a ceiling on the max rate. If the account is shrinking each year by double digits, the taxpayer either is poorly invested or a bear market exists. If that happens, the amounts you take out to satisfy the 72t are being more productively used than the assets in the account.2007-10-31 18:56, By: Alan S., IP: [24.116.165.60]

L2: Mid term rateAssume that the calculations using the maximum rate (say 5.5%)indicate that you will need to assign $ 175,000 to the SEPP, and using the minimum rate (say 5.0%)you could assign $ 200,000. If you assign $ 200,000 to the SEPP, and earn 5% in income, you would be earning $ 10,000 per year. If you took out $ 24,000 a year, and the value of your investments did not change, then the SEPP account would decrease by $ 14,000 per year. After 5 years it would be worth $ 130,000. If the value increased or decreased over the 5 years, then the remaining value would be adjusted accordingly.
But if you had assigned $ 100,000, it would have earned only $ 5,000, and you would have withdrawn $ 19,000 more than earned each year. In that case you would have had only $ 5,000 left if there was no change in value. To be safe,I would probably suggest assigning $ 125,000 to the SEPP, which would allow for a 20% decline over 5 years.I would suggest keeping the other $ 75,000 (of your $ 200,000) in a separate IRA outside of the SEPP to use as emergency funds, or to set up a 2nd SEPP, if needed, in the future.2007-10-31 21:21, By: dlzallestaxes, IP: [151.197.65.85]

L2: Mid term rateWhat am I missing in DLZ’s explanations?

Assumeyou set up your SEPP 72-T with an amount that will be entirely used up at the end of 5 years or age 59 1/2, whichever is later, assuming a given rate in your calculation.۝

I believe this is an impossible scenario since SEPP Plans are based on life expectancy and not a period certain, like5 years.
If you put in a “buffer amount” in excess of the reverse calculated SEPP 72-T “investments”, then even if you earn less than the rate in the calculation, you could continue the plan by using amounts from this initial excess.۝
The only wayto create a buffer amount۝ is to use an assumed interest rate that is less than the 120% FMR for a given account valuation. Maybe that”s what he is trying to say.
But if you had assigned $ 100,000, it would have earned only $ 5,000, and you would have withdrawn $ 19,000 more than earned each year.۝
I think this last item describes a bust۝ situation because you didn”t have a large enough amount for the account value and you are taking out too much each year.
Just my thoughts.2007-11-01 06:56, By: Jim, IP: [24.252.195.14]

L2: Mid term rate”What we have here is a failure to communicate!”
Lots of people get the maximum permissible interest rate assumption (call it the IRS rate) and their “hoped for” / “expected rate of return” confused. These two rates have nothing to with each other.
1. The IRS rate (currently in the neighborhood of 5.25%) is a “ceiling” rate that is used by the taxpayer as input into the amortization or annuization formulas. This rate along with the pricipal balance and life expectancy determines the annual distribution. These formulas presume long life expectancies; e.g. 25 to 40 years and implicitly assume that the principal balance of the account will in-fact erode or decrease over time; just like a mortgage balance goes down over the years as payments are made. The purpose of a ceiling rate is the IRS”s mechanism of forcing a taxpayer to wear a saftey belt; e.g. prohibiting taxpayers from making interest rate assumptions that are unreasoanbly too high such that the annual distribution erodes the principal balance too quickly resulting in a situation where the taxpayer is vertical (living) and broke.
2. An earnings assumption rate is a rate developed by the taxpayer and/or the taxpayer”s financial advisor and is predicated on the their expertise at investing as well as general level of risk assumption. The IRS has absolutely no perview / authority as to how a taxpayer invests the corpus of the account (other than prohibiting some outlier investments such as collectibles). As a result, the actual performance of the SEPP account over time is a complete wild card which may cause the value of the account to fall ro rise over time even including the annual distribution.
3. Next there is the actual withdrawal rate. If one assumes an IRS rate of 5.25%, the actual computed withdrawal rate (in dollars) is in the neighborhood of 6.75%; 1.5% higher than the IRS rate. This is correct remembering that the formulas are actually designed to cause an errosion of principal over the decades. Said another way, assume 5.25% on $100,000 will result in an annual distribution near $6,750 (6.75%) per year.
In summary, it is nice (but relatively irrelevant) for a taxpayer to make an earnings assumption rate; what really matters is the actual withdrawal rate versus actual account performance. In the end it is relatively simple. If the actual performance rate of the account is greater than the actual withdrawal rate; then the account balance goes up; conversely, if the actual performance rate is less than the actual withdrawal rate, the account balance goes down.
Clear as mud???
TheBadger
wjstecker@wispertel.net

2007-11-01 07:19, By: TheBadger, IP: [72.42.66.34]

L2: Mid term rateBill:
Thanks for your very clear explanation. In fact,your bottom linesounds a lot like the second sentence, first paragraph of Gordon”s first post.
Jim2007-11-01 07:27, By: Jim, IP: [24.252.195.14]