My accountant is scaring the heck out of me

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L1: My accountant is scaring the heck out of meHello all, I’m 40 years old, soon to be 41 and was considering setting up a 72T with $1M in a separate vanguard fund. First off, it seems difficult to find folks well versed on this part of the code. I had to explain to my accountant what I was trying to do, and she came back advising against it. Her thought was that if I set it up (I estimate about $30K per year) that I will be locked in for a very long time (59 1/2 I believe). Plus, it will be added income that I will have to pay ordinary tax on…
My thoughts are paying taxes on an extra $30K that I may or may not need is not a big deal…if I don’t need it, I’ll stick it in a cash account…taxes aren’t going to go down! Second, if I plan to keep that $1M separate, setting up the SEPP would almost add a level of discipline not to mess with it since I would then incur the 10% tax – assuming on everything I withdrawal from the SEPP account.
I’d love the board’s opinions…am I missing something? I want to keep the $1M separate. I have it mostly in Wellesley at Vanguard and do not plan to touch it. Also, the June timeframe for the midterm rate looks to be most favorable and finally, is this a pretty simple setup for the professionals at Vanguard…my accountant made it sound like a complicated mess. I plan to broach this with a customer service person at Vanguard this week. Thanks all!2013-06-02 02:17, By: Penta, IP: []

L2: My accountant is scaring the heck out of me1. I would ask your accountant why she is so vehemently against setting up a SEPP 72-T.
2. Ask her if she has another suggestion.
3. If your acountant cannot give you good answers to # 1 & # 2, I would change accountants.
4.Vanguard is very experienced with SEPP 72-T plans, as you can tell by the numerous people who have posted favorable comments on this list-serve.
5. Since you do not mind paying the tax now, at today’s rates, rather than later at possibly higher rates, did your accountant suggest doing a ROTH CONVERSION, if you have enough funds outside of your IRA to pay the taxes ? ( As a result, all future income AND GROWTH in the ROTH IRA will be tax free for you, your spouse, and any children, and grandchildren.) This can be done over a period of years, for part or all of your IRA, rather than all done now. — Did your accountant discuss this option ?
6. We usually suggest setting up 2 or more SEPP 72-T plans in case you need to bust one at some time in the future for an emergency. — Is your accountant aware of that approach, which she might be more comfortable with ?
7. See # 3 above.
2013-06-02 03:07, By: dlzallestaxes, IP: []

L3: My accountant is scaring the heck out of meI think what DLZ means with his #6 is to have TWO IRA’s, (not 2 SEPP 72Tplans) and use just one (the $1million one in this example) for the SEPP Plan, so a need to make a specific (non-SEPP) withdrawal for an emergency can be done from 2nd (Non-SEPP) IRA, and then only the 10% penalty on that specific withdrawal would occur, and not damage the IRA with the SEPP plan.2013-06-02 03:58, By: Ken, IP: []

L4: My accountant is scaring the heck out of meOr 2 different SEPP 72-T plans, plus an IRA account that is not a SEPP 72-T for increased flexibility, and reduced exposure.2013-06-02 04:11, By: dlzallestaxes, IP: []

L5: My accountant is scaring the heck out of meBased on your post, I’m not so sure your CPA is totally clueless about SEPP Plans under 72(t). Yes, you will be locked into distributions for about 19 years until your age 59.5, which gives you ample time for either you or your custodian to screw something up. Then you have an extra tax liability going back to your first distribution.
If I’m reading you right, you don’t really need the money you would receive from the SEPP Plan distributions, you just think it is a neat idea to withdraw some funds to teach you financial discipline. If I’m wrong I apologize. But if I’m right then I would refer you to DLZ’s suggestion to begin systematically processing Roth IRA conversions over the next 19 years or so.
You pay the tax on the conversion from NON-CONVERSION FUNDS, ie, funds from another account like earned income or savings. Allowing Roth funds to grow until normal reirement for you will be more advantageous than the SEPP Plan and funding a low-interest savings account! Given the current political climate I would expect your “normal retirement age” to move closer to 70 rather than mid-60’s.
If you wait until age 59.5 and draw from the oldest Roth Conversion Account first then you will have tax-free money to live on. Yes, TAX-FREE since you pay the tax upon conversion and the growth comes out without paying any additional taxes.
My vote is for the Roth Convesion option.
Jim F2013-06-03 14:42, By: Jim F, IP: []

L6: My accountant is scaring the heck out of meAnd if you retire at 59 1/2 thru 67+, you can take distributions from your traditional IRA at lower regular tax rates, and defer SS benefits until 70 or whatever, and get a 32% increase in your SS benefits for life, unless they change those rules between now and then.2013-06-03 18:28, By: dlzallestaxes, IP: []

L2: My accountant is scaring the heck out of meAre you planning on eventually just living off the payments anytime soon as early retirement i.e. the next few years? If not and you plan on working until 59 1/2 or laterI would have to second doing conversions to Roth IRAs over time.
One caution on converting to a Roth IRA, because of your age and potential for withdrawal. Normally you can withdraw your CONTRIBUTIONS from a Roth IRA and there isn’t a tax implication. However if you convert to a Roth, the 5 year rule still applies on the conversion money. Just do a search for more specifics, but thought it would be worth noting, so you don’t convert and then withdraw within a couple years and get a surprise.
A lot of accountants just crunch the numbers and tend to just take into consideration tax implications in the short run as opposed to long term planning. When it gets into non-standard things like 72(t) and NUA, you’ll be hard pressed to find an accountant really comfortable with the subject matter. I’ve had my parents go through a couple of accounts because of arguing about Traditional vs Roth. The accountants favored the traditional because of small deductions on their taxes, I favored Roth because of 10+ years down the road, no RMD, and the affect on social security. This year their accountant was strongly opposed to taking advantage of NUA on my fathers XOM 401(k), without knowing the details. Moral of the story, do as much of your own homework as possible and double check it.
You may check with your accountant and get more info as to why she is opposed. Could be fear that the account drops and your plan gets broke. Who knows. But your withdrawal rate at 3% seems modest.2013-06-07 17:32, By: brkr12002, IP: []

L3: My accountant is scaring the heck out of meYou are correct. Many/most accountants are clueless about NUA, and almost as many with SEPP 72-T. J K Lasser “YOUR INCOME TAX” ( about $ 20) has an excellent discussion of NUA ( Net Unrealized Appreciation of Employer Stock in 401-K and pension/profit-sharing plans, not IRAs). Also, see IRC 402(e)(4), or google NUA tax provision.
You are also right that a 3% withdrawal rate is an excellent conservative amount. Most financial advisors have reduced their recommended figures from 5% to 4%, so 3% is definitely a good idea.
If you do one or more ROTH CONVERSIONS, then each one has its own 5-year rule, and any withdrawals within 5 years from any single conversion are subject to the 10% penalty, on top of the regular income tax you paid on the conversion. A major point lost on most ccountants and taxpayers is that the amount converted will always have been subject to income tax at some time, so the really important aspect is that all future INTEREST & DIVIDEND INCOME, AND CAPITAL GAINS will never be taxed in a ROTH, but will always be taxed at Regular Tax rates, not even the lower Dividend and Capital Gains tax rates.
It will be worth your time and effort to find an accountant, or financial advisor, who is knowledgeable and experienced in these areas. I saved someone who became a client over $ 100,000 in taxes when he used the NUA tax provision on his Merck retirement account. A good advisor should always save you more in taxes than their fees.2013-06-07 18:07, By: dlzallestaxes, IP: []