Newbie

L1: Newbie: 72t account set-upHello,
My D.O.B is 09.22.1964
I stopped working due to health reasons in August 2014. I transferred my old 403b retirement plan into a Traditional IRA account with Vanguard. I currently have $168,000 in the account. I would like to set-up a SEPP plan to start withdrawals on 1/15/2016. My income tax preparer is clueless with regards to IRS Article 72(t) and SEPP Plan. His advise for me was not to pursue setting up the SEPP plan. When I called Vanguard for help setting up the SEPP plan the customer representative told me I need to obtain the IRS approval in order to set-up the plan. Therefore, I have the following questions:
1) How do I set-up an SEPP plan?
2) Do I need written approval from the IRS to set-up the SEPP plan?
3) What type of documents do I need to submit to start the SEPP plan and to whom?
4) Can I stop taking withdrawals from the SEPP plan at age 62 without incurring the (10%) early withdrawal penalty? (I can start taking my pension from my former employer at 62.)
5) Do you recommend I hire a professional consultant to set-up the SEPP plan? (I was charged a fee of $1,500 by a website consultant)
Thanks in advance for considering my request/questions.2015-12-05 12:26, By: Cassius, IP: [72.74.30.202]

L2: Newbie: 72t account set-upAsk your tax preparer why he is telling you not to set up a SEPP 72-T plan. Is it because he doesn’t understand what it is all about, or because he thinks you might lack the discipline to not bust it before age 59 1/2 because of the uncertainty of your needs for the next 8 1/2 years ? Are you eligible for SS Disability ? Are you eligible for other withdrawals that are exceptions to the 10% penalty, such as health insurance premiums, etc. ? Call Vanguard again, and speak to a different representative, because the first one was not really adequately trained about SEPP 72-T requirements. If necessary, ask to talk to a supervisor to confirm that IRS does not pre-approve SEPP 72-T plans (but might review them if you are audited for some other reason), and whether or not Vanguard needs, or wants, a copy of your documentation for their files.
Re your questions :
1. You determine how much cash flow you want per year, and then use the “reverse calculator” on this website to establish how much of the $ 168,000 to put in the account for your plan. We usually recommend setting aside some of your IRA into a separate IRA account for future emergencies, say $ 18,000 in your situation.
2. You do not need IRS approval of your SEPP plan, and the IRS has no mechanism or procedures for any such pre-approval. Even if they did, with their reduced workforce, and approaching tax filing season, and very limited number of people at the IRS who even understand SEPP 72-T, you would be lucky to have someone look at it for 6-12 months.
3. You have to select an appropriate date to use for the balance in your calculation. Usually you will use the highest month-end balance in the last 6 months. There is no one that you submit any documents to, unless Vanguard requests a copy for some reason.
4. Your SEPP 72-T plan will stop at age 59 1/2 since that is more than 5 years. Then you can stop taking the annual withdrawals, and can take or not take any amount you want to take at any time. At 70 1/2 you will required to start to take “Required Minimum Distributions” from your IRA, but can take -0- from 59 1/2 until 70 1/2, depending upon your cash flow needs, and tax situation.
5. I recommend that you hire a financial planner or tax accountant to work with you to establish a “Retirement Plan” based upon your financial and tax situation from now thru age 70 1/2. It will be well worth the expenditure. ( What a “website consultant” charged you is immaterial to this discussion !!!!)2015-12-05 15:51, By: dlzallestaxes, IP: [71.175.93.74]

L3: Newbie: 72t account set-upThanks for the feedback. I am currently collecting from SS disability as well as an individual disability insurance policy. I plan on utilizing the total amount in the Vanguard IRA towards the SEPP plan. In addition to the Vanguard IRA, I have a TIAA-CREF Roth IRA account (+/- $100k) set aside for future income needs later in my life. I will hire a local tax accountant to help make sure I do not bust the SEPP plan.2015-12-05 20:06, By: cassius, IP: [72.74.30.202]

L4: Newbie: 72t account set-upIs your disability income from your disability policy tax-free because it is a plan that you paid the premiums for ?
You have many moving parts here, and it will be important to try to minimize your taxable income. On the other hand, if you also have a taxable (regular) investment account, it would be wise to structure your retirement plan so that you keep taxable income at no more than 15%, if possible. That way all Qualified Dividends and Long Term Capital Gains in your regular taxable account will be tax free.
In addition, there is a complex calculation to determine how much of your Social Security Benefits are taxable. Below a certain amount of income, they are not taxable. Therefore, it might be beneficial under some circumstances, possibly in your case, to not defer taking distributions from your ROTH IRA, but rather to take them because they are tax-free, and to defer Social Security Retirement Benefits from 62 to 70. In that case, you would have a 70% increase in SS Benefits at 70 over what they would be at age 62. But your medical problem might mean that you have a limited life expectancy.
I believe that there are too many factors to be able to consider all of the inter-related aspects in this forum.2015-12-05 21:39, By: dlzallestaxes, IP: [71.175.93.74]

L5: Newbie: 72t account set-upIf your disability meets the definition of Sec 72(m)(7), which basically requires that the disability be of long and indefinite duration or which will lead to death, get a letter from your MD to that effect including reference to the code section. Send it to your IRA custodian and ask if they are willing to accept this as evidence allowing them to code your 1099R with code 3 in Box 7. If they will do that, you will not need a SEPP and will have unrestricted penalty free access to your IRA account.
If your condition is considered remediable, then you will not qualify. Most SSD recipients do qualify, but SSD does not use the same code section to determine claim approval, so SSD does not automatically result in a code 3.
If you begin a SEPP and later qualify for the code 3, then your SEPP automatically ends. The custodian may then issue 2 1099R forms, one with code 3 for distributionsafter the disability, and code 1 or 2 for the part of the year before the disability date.2015-12-06 00:51, By: Alan S, IP: [160.3.87.235]