New SEPP Double Check
L1: New SEPP Double CheckFirst off, great site. Thank you for all you do.
Should be a pretty straightforward one (famous last words):
Traditional IRA account balance as of July 31 = 315080.28
Birth date – 3/21/63
Using August 120% Midterm Rate of 2.34 and Amortization method.
First withdraw to be on September 15 and will be prorating the first year.
Year 2017 = 4855.75
Years 2018 – 2022 = 14567.24
I’ll be 59.5 on September 21, 2022 which also corresponds to 5 years of SEPP so any withdraws made after that time will be Ordinary Income. For all years including2022, I will file a 5329. All correct?
2017-08-29 14:16, By: Garpolly, IP: [18.104.22.168]
L2: New SEPP Double CheckCalculations and statements you made are correct. Note that all IRA distributions are taxed as ordinary income, so I think you meant to say that distributions after 9/21/22 are not SEPP distributions because the plan ends on 9/21 and are also penalty free because you have reached 59.5. If you take distributions before and after 9/21 you will get two 1099R forms, one coded 1 (File 5329 to claim SEPP exception code 02) and the other code 7 to indicate a normal distribution.
Also, as planned your plan ends at 59.5, but if your initial distribution was delayed until after 9/21 then you will have a 5 year plan (ends 5 years after the first distribution). If you end up with a 5 year plan, you probably should not pro rate the first year, which means that you would take a full annual for 2017-2021, and then nothing in 2022 before the plan ends. That would be safer according to Arnold v Commissioner, although the IRS never fully explained how they would interpret all aspects of Arnold v Commissioner. So if your plan includes distributions in 6 calendar years while being a 5 year plan, it is unlikely but still possible that the IRS could bust it. In short, be sure you get the initial distribution out before 9/21/2017 if you want to pro rate year 1.
2017-08-29 19:07, By: Alan S, IP: [22.214.171.124]
L3: New SEPP Double CheckThanks so much for the reply and insight. I really want to prorate the first year as I do not want to report the extra roughly $10K on my 2017 taxes. So judging from your excellent reply, I have to be REALLY sure I make my distribution prior to September 21st. I will then make a full annual distribution for each year 2018 – 2022.2017-08-29 20:43, By: Garpolly, IP: [126.96.36.199]
L4: New SEPP Double CheckCorrect. If you get the first distribution out in time, you will have two options for 2022. Either a full annual or a pro rated amount (8/12 of the annual) which is enough to bring your total for the plan up to the minimum of 60 months worth.2017-08-29 23:34, By: Alan S, IP: [188.8.131.52]
L4: New SEPP Double CheckYou could consider splitting your IRA into 2 accounts. Use the smaller one to take a full annual SEPP distribution in 2017. Wait until Jan. 2018 to set up the 2nd SEPP. The total annual distributions of the 2 SEPPs would be about the same for 2018 thru 2021. Then handled 2022 accordingly.2017-08-29 23:40, By: dlzallestaxes, IP: [184.108.40.206]