Planning for my 72t
L1: Planning for my 72tHi, I just discovered this site today! I have purchased “A Practical Guide to IRD 72(t) and I look forward to reading.
Like another forum member, hoping to avoid “Ready, Fire, Aim”! I like that statement!
Here are my details:
46 Years Old (10/1964)
IRA Balance = 1,300,000
Single, with no children (co-habitating, but my ‘spousal equivalent’ has her money separate from mine, we each file single and we share our household expenses in one small joint account).
A little background:
My interest in the SEPP is primarily a control issue. My portfolio has appreciated well in recent years and I want to benefit from that appreciation by taking penalty free funds and pay down some investment property mortgages (before the government takes my money to pay down our debt!!!). By the time I am 60 I can own those properties outright if I double the principal payments. I cannot do that with my current revenue streams
I will need to continue SEPPs until age 59.5.
A few relevant points:
When speaking with an IRS Representative, I was given the impression that even if I have multiple IRAs, the collective value of all my IRAs would be the basis for the calculation. Reading this forum, it appears that I should consider splitting my IRA and have a SEPP and a “non SEPP IRA”
Recently transferred my entire IRA to USAA from TDAmeritrade to leverage USAAs Wealth Management services.
2011-06-07 21:11, By: NJonge01, IP: [220.127.116.11]
L2: Planning for my 72tI will be interested to see if my case dictates that I establish a “non SEPP” IRA.2011-06-07 21:18, By: NJonge01, IP: [18.104.22.168]
L3: Planning for my 72tHello and welcome to the 72t forum.
There are two schools of thought regarding the 2 IRAs, one for your SEPP and one not for SEPP but for emergency withdrawals. Whether or not you need two IRAs depends on your other assets. I never divided my IRA when setting up my SEPP. I had significant other assets on which to call for emergency funds, so did not need an emergency fund via another IRA.
That said, there is nothing wrong with splitting a large IRA into two parts. I suggest that you use the calculators on this site to see whether or not your IRA can generate the income you want in retirement. If you have more assets in your IRA than are needed to generate the cash flow you want, then splitting is probably the thing to do. If not, then you will have to re-evaluate your spending habits and / or your proposed retirement date.
Something that you will soon discover is that many IRS agents and even their supervisors are not well trained in the essentials of 72t. The fact is, you can have a single IRA or multiple IRAs and one or any combination of them can be used for your SEPP. As long as these IRAs have different account numbers, they do not interfere with each other in regard to SEPP.
SEPP beginners should understand that: 1) they need to keep excellent records of their SEPP setup and operation. A 3″ 3-ring binder doesn’t take up much shelf space and works well for this, especially when divided into sections by those tabbed pages; and 2) make absolutely sure that your annual SEPP distribution is the same as your IRS approved calculation. No one else will watch for this, so you have to do that. SEPP distributions MUST be the same amount each year until the longer of 5 years or age 59.5, unless you choose an annual recalculation method. In your case, that would be age 59.5.
There are many ins and outs in the setting up and managing of a SEPP. Do not expect to get much help with this from your custodian or the IRS. The responsibility for your SEPP is 100% on your shoulders. There are some real SEPP and tax experts on this site plus a lot of other good folks who have “been there and done that” with a SEPP. Mine started in 2005 and ended in 2010 so it’s a “done deal” at this time. Thanks to the help and suggestions I received here, everything went very well. I will be saving the 3-ring binder with all my SEPP info until 7 years after it ended, just to be sure that there aren’t any problems that this info could resolve.
Oh, yes… one other thing… make sure that you check your initial 1099-R from your SEPP IRA. It will likely be coded with a “1” in box 7 (for early distribution, no known exception), so you will need to file a form 5329 with your tax filing to claim the 72t exemption from the 10% early withdrawal penalty tax. If you use a computer program for your taxes, this will likely print out with your completed tax forms.
Please feel free to ask any other questions you may have about 72t or setting up a SEPP. Chances are good that you will get accurate answers to your questions quickly.2011-06-07 23:32, By: Ed_B, IP: [22.214.171.124]
L4: Planning for my 72tEd covered the basic orientation to SEPP plans very well. All I would add there is that 13 years is a long time to be able to forecast your expenses with any accuracy, and in that situation it often works well to plan to start a second SEPP about half way through to prevent you from having to hedge your cost estimates so much that you force yourself to take too much out of yourinitial plan by using an excessive balance.
Beyond that, I can’t say thatI understand the benefits of reducing your leverage on the properties when current interest rates are at an historic low. The govt policy of flooding the market with dollars is bound to drive rates much higher eventually, but if your rates are fixed at the current low levels, why rush to pay off that debt? If taxes rise, your mortgage expenses will provide some protection against the rising taxes. If you eventually have large cap gains taxed at a higher rate than today, that will exist whether you pay off the debt now or not. And you will have to draw down your retirement accounts at a much slower rate with a less aggressive approach to the real estate debt.2011-06-08 00:05, By: Alan S., IP: [126.96.36.199]
L5: Planning for my 72tThe only thing that I want to add to the excellent, and thorough, advice that others have responded is to consider the income tax aspects as well. If you are already in a high tax bracket, these distributions will be taxed at those high rates.
I would suggest doing tax and cash flow projections in addition to the other analyses that you have appparently done.
If you have profits from your rental activities, then the mortgage interest is saving you taxes at those high rates. Once you pay off those mortgages, you will lose those deductions, and pay those high rates on the higher profits.
Also, consider if these SEPP 72-T distributions are subject to state taxes, as well as federal income taxes.
If you have significant assets outside of retirement accounts to pay the applicable taxes, you might want to consider conversions from your Traditional IRAs to ROTH IRAs, which will result in all future income and appreciation being tax free forever to you and your beneficiaries. The tax on theAMOUNT CONVERTEDwill probably be the same either now or ultimately when you withdraw it during retirement.2011-06-08 05:39, By: dlzallestaxes, IP: [188.8.131.52]