Muliple IRAs and SEPP
L1: Muliple IRAs and SEPPI am planning to start a SEPP in the first quarter of 2009. I currently have multiple IRAs but the majority of my assets are in one of them. Here is what I would like to do and the reason why. Any feedback will be appreciated.
1. I want to include all my IRAs in a SEPP UniverseÛ to maximize my payout.
2. I want to take the SEPP payout annually from only one IRA (the one where I have the majority of my assets).
3. I want to continue to have the flexibility to transfer assets between financial institutions. I am well diversified and keep an appropriate mix of equity and fixed income assets. Many times the best rates for the fixed income assets (for a given risk) are with credit unions. For example, recently a credit union offered a 5.5% 18 month CD. I want to continue to take advantage of these opportunities. Therefore, I want to be able to:
a. Open new IRA accounts with my credit union(s) and have the trustee from the sending financial institution transfer funds to the IRA with the new financial institution (each CD with the credit unions are separate IRA accounts).
b. When CDs mature, I want the flexibility to transfer the funds back to the financial institution where my mainÛ IRA resides.
Assuming one transfers assets appropriatelyÛ, how much risk is there transferring assets of an existing SEPP from one financial institution to another (especially given the 2007 ruling PLR2007-20023)? Since each CD in my credit union is a separate IRA, when I open a new CD, it’s essentially a new IRA. Of course, the only assets I would transfer into it would be from an IRA within the SEPP. Is this a problem?2008-04-19 13:06, By: Sandy, IP: [22.214.171.124]
L2: Muliple IRAs and SEPPThere might be a very small but unquantifiable risk as a result of PLR 2007 20023 due to your plan of making several partial transfers within your SEPP universe of account.
However, the real risk here is the number of moving parts to your plan which collectively increase the risk of an error of execution within your SEPP. The very first thing I would do is to make sure any CUs or banks you use for the CDs will provide a direct transfer back to your main IRA. The reason this is critical is that if they will only cut you a check and you have to roll it into the account yourself, you are limited to one rollover per year that your main IRA can receive. If you have a disallowed rollover it will create an excess contribution that you will have to correct and will have to work the correction so you do not bust the SEPP in the process.
Since you will certainly be filing a 5329 to claim your exception, in addition you will need to make sure your initial calculations are well documented with respect to your SEPP universe. For your opening account balance you will need statements that are very close to the same date on each account, at least as close as possible to document that your initial balance reflects several IRA accounts.
In summary, there are risks, but this is doable if you are meticulous in all respects.2008-04-19 20:26, By: Alan S., IP: [126.96.36.199]
L2: Muliple IRAs and SEPPHello, Sandy:
My thoughts on this parallel Allan”s “too many moving parts” comment. Your plan sounds possible but not recommended. A successful SEPP is something that takes some care to set up and maintain. The more things that are built into it that CAN go wrong, MAY go wrong and bust the SEPP. This is usually an expensive mistake.
Including all of your IRAs in your SEPP universe is fine, as long as you have some emergency “Oh, cr@p!” money somewhere to cover those unexpected things that just about always come up… a new roof, a new heating / cooling system, or an unreimbursed medical expense, for example. Most SEPP owners recommend a stash of cash that can be raided in an emergency and not bust a running SEPP.
Taking annual payments is fine but you must be able to budget carefully so that you don”t spend too much too early in any given year. Most of us retired from jobs that paid us once or twice a month. We grew used to this over time and adjusted our spending habits accordingly. I now take quarterly SEPP payments. While this works fine for me, I would not care to take larger payments at longer intervals. I can budget the quarterly payments just fine but longer ones require more care.Transferring assets around is one of the bigger tripping hazards out there. A botched transfer might be fixable, if caught in time, or it might not be depending on the circumstancs involved. PLR2007-20023 seems to have muddied the waters on this issue more than it has clarified them. Since it looks very much as if the IRS hasn”t quite got this figured out, how can anyone else? My solution to this would be to avoid transfers while a SEPP is running. The small advantage created by transferring assets could well end up costing much more than it earns.
Ed2008-04-20 09:17, By: Ed_B, IP: [188.8.131.52]
L2: Muliple IRAs and SEPPThank you for the feedback. I will have a substantial emergency fund outside of my IRAs. I understand the importance of doing the transfers correctly. I don’t think it is difficult requesting and tracking a trustee to trustee asset transfer. My main concern is whether multiple IRAs are permissible within a single SEPP andif so, that transfers (partial and full) are also allowed.
A layman (such as me) reading Ref Rul 2002-62 might easily conclude that each individual SEPP can only consist of one IRA with one plan administrator. These instructions specifically prohibit transfers between retirement plansÛ. So, it boils down to what is considered a retirement planÛ. If one thinks the IRS considers a retirement planÛ as being an individual IRA with a specific plan administrator, then transfers (and a SEPP with multiple IRAs) are not allowed. On the other hand, if one believes the IRS defines a retirement planÛ as referring to different typesÛ of plans (IRA, 401k, etc.), then the instructions are only addressing those specific types of transfers leaving open the question of a SEPP with multiple IRAs and transfers between them.
Many people have interpreted the letter rulingsÛ and/or determination lettersÛ on the subject as implying the IRS does allow for multiple IRAs in a SEPP. These people have concluded from the letter rulingsÛ that the Ref Rul 2002-62 prohibiting transfers are addressing transfers between different types of plans (401K, IRA, etc), not between IRAs included in a SEPP. Apparently, these rulings implied through example that SEPPs do allow for multiple IRAs and that transfers are allowed. That is until PLR2007-20023 came out last year, which “muddied” the waters.
I would guess that many people have multiple IRAs and since the government allows the early withdrawal of funds through the 72t regulations, the IRS needs to specifically address this. I think my next step will be to request an information letter to see if the IRS can provide an appropriate response. I think it is unconscionable that the IRS leaves us hanging in the wind when the consequences of making the wrong decision can be so costly.
One final point: it seems like many people would prefer to be conservative and keep their SEPP as simple as possible to avoid busting it. However, I think it is very important to have the flexibility to transfer IRA assets between administrators. I don’t see that as high risk unless it isn’t allowed. That’s what I need to know for sure. Furthermore, I don’t want to be held hostage by my plan administrator. If I see a financial instrument with above market rates, I should be able to take advantage of it. 2008-04-20 11:40, By: Sandy, IP: [184.108.40.206]
L2: Muliple IRAs and SEPPThere are quite a few IRS rulings which establish that a different retirement plan is meant a different TYPE of retirement plan. While PLR 2007 20023 raises several related questions, as time continues to pass without follow up, it does look more like an aberration as Bill Stecker suspected. Don”t know if you saw this, but here is his information request and the unenlightening response he received:
http://72t.net/Articles/ArticleShow.aspx?WA=2602008-04-21 16:40, By: Alan S., IP: [220.127.116.11]
L2: Muliple IRAs and SEPPI did see Bill Stecker”s information request and I appreciate it and I agree the IRS response was lacking. I”d be interested in knowing what specific questions the PLR 2007 20023 raises. If we know for sure it was something we all agree would bust the SEPP, that would be one thing. Otherwise, why did it get busted?
Are people (almost) 100% convinced by “different retirement plan” the IRS means different “type” of plan? That concern bothers me as well as the fact that the IRS instructions don”t specifically say one can combine IRAs to determine the “account balance”.At least I”m not aware of where it says that.As I said, I have put togehter my own information request and we”ll see what happens. I am currently in Mexico but I will mail it as soon as I get back home. Thanks,Sandy2008-04-21 17:45, By: Sandy, IP: [18.104.22.168]
L2: Muliple IRAs and SEPPWARNING–BE CAREFUL —
There is a ONCE-A-YEAR RULE that limits the number of rollovers from ANY IRA or the RECEIVING IRA to ONE in any one-year (i.e. 12 month) period (NOT CALENDAR YEAR) beginning on the date the taxpayer receives the IRA distribution. It applies only to ROLLOVERS FROM ONE IRA TO ANOTHER. It does not apply to rollovers of pension distributions, NOR DOES IT APPLY TO TRUSTEE-TO-TRUSTEE TRANSFERS. (IRS Letter Ruling 8651085)
This one can easily bite you badly if you are not careful !!!! With all of your planned flexibility moves I”m willing to bet that within the 5-year period you will slip up once, and it will cost you a fortune in RETROACTIVE PENALTIES AND INTEREST.
Consider yourself WARNED !!!2008-04-23 20:46, By: dlzallestaxes, IP: [22.214.171.124]
L2: Muliple IRAs and SEPPThank you for the warning. Transfers are not something I would do very often. All transfers I have done in the past were trustee-to-trustee and that is how I would do them in the futre. I know the rollover option is availableand limited but I would make sure the financialinstitutions I use can handlea trustee-to-trustee transfer. Handling IRA money using the rollover optionusually means lost income while the check is being manually deposited and cleared. 2008-04-23 21:51, By: Sandy, IP: [126.96.36.199]