Pymt from 2 custodians for one SEPP

L1: Pymt from 2 custodians for one SEPPI have a client that wants to establish a SEPP but wants to include 2 IRA”s, one held with a mutual fund company and 1 in a VA. She wants to include the value of both accounts to create the SEPP and take distributions from each that will total the annual amount she needs to take; however, she will have to take a much higher distribution from the mutual fund because the VA limits the amount she can take each year. I know this is a more complicated way of doing things but there seems to be no other way to do this to get the amount she needs.I”m afraid this might look like two separate SEPPs. But, as long as we document the account #”s that were used in the initial calc and then take exactly the amount that results from that calculation each year, is this acceptable? 2008-01-16 10:47, By: Carol, IP: [74.93.198.9]
L2: Pymt from 2 custodians for one SEPPCarol,
Yes, your plan is acceptable. Sometimes an undesirable level of complexity is needed because that is the only way to generate the needed dollars without penalty. Just be extra thorough with the plan documentation because the client will almost certainly be filing a 5329 every year to report the 72t exception. Once the client calculates the respective amounts from each IRA account, keeping that breakdown constant will probably reduce chances of an error.2008-01-16 13:41, By: Alan S., IP: [24.116.165.60]

L2: Pymt from 2 custodians for one SEPPThanks for the help. 2008-01-16 13:49, By: Carol, IP: [74.93.198.9]

L2: Pymt from 2 custodians for one SEPPCarol:
Yes, you can usetwo IRA”s inone SEPP universe to determine the starting balance, just like Alan said. And since you will be taking different amounts from each IRA to total the required SEPP distribution, you will have more “moving parts” to the plan than normal. So try to limit the number of moving parts to only recalculating the amount required from each IRA to satisfy distribution requirements and not bust the plan under a non-recalculating۝ scenario.
I”m going to assume that you will use the Amortization method since it yields the greatest distribution amount, and that you will NOT perform annual recalculation. I”m not a fan of recalculation because:
1. Most people function best on regular monthlyincomes. However, in this case I would recommend quarterly distributions with the last occurring in October, or November at the latest so you can clean up any custodian goofs before year-end.
2. Annual recalculation allows someone to take advantage of a rising market to get a higher distribution amount. Unfortunately, when the market falls, they have to recalculate to a lower distribution amount, and this upset income plans. (See item 1 above.)
3. Some people who are taking a fixed amount each year willconsider “busting their plan” so they can start a newplan with a higheraccount value(due to the rising market) so they can get a higher distribution amount. Unfortunately they do not take into account that rapidly rising markets tend to also fall rapidly, like occurred in the late 1990”s and early 2000”s. This person has the added penalty and interest expenses of a busted plan. The money has to come from someplace, usually an additional distribution from their SEPP Plan account(s) since they don’t have the money elsewhere. (If they did have the funds elsewhere, why worry about starting a new SEPP Plan?) After starting the new SEPP distributions, they have the problem of now taking a greater annual distribution from an account that may begin falling in value due to a receding stock market. Now the new problem is paying regular distributions from an ever shrinking account value, resulting in disaster. The one-time switch to RMD may not salvage the account.
Carol, in your situation you will need to closely monitor the ever changing, annual amount you may withdraw from the VA and make changes to the amount taken from the MF account. Hopefully the VA will reach the end of the surrender period before the 5-year and age 59 _ SEPP requirements are completed so you will have more flexibility with the VA distributions.
Good luck.
Jim2008-01-17 07:22, By: Jim, IP: [24.252.195.14]

L2: Pymt from 2 custodians for one SEPPJim:
Thank you for your very detailed remarks. The VA allows the client a 10% free withdraw based on the initial investment amount so it is predictable from year to year. Therefore, the balance coming from the mutual fund willnot change. It actually works out that 10% of the initial VA investment is 50% of the total amount required. The other 50% will come from the mutual fund. Although the distributions coming from each IRA are the same, the starting balances of the two accounts are very different and that was my initial concern. Neither custodian will be able to verify that the calculation is accurate so I am assuming they will each provide a Code 1.As long as the client files a 5329, I am hoping that will suffice.
The client is taking a monthly distribution from each account. Personally, I don”t like the monthly distribution because it gives the twocustodians 12 chances to make an error – and we know that is very possible. But, this client does not want the distribution annually or quarterly so this is the way we have to do it. I was not planning to recalc. I don”t like the recalc method and actually have never used it because of many of the same things you pointed out. Since the VA does not base the “free withdraw” on contract value, I think it makes this situation a little cleaner; although, I am still not in favor of the two custodian arrangement. Unfortunately, this is the onlyway to achieve the amount the client needs without incurring surrender charges on the annuity.
Thanks again for the help.2008-01-17 07:51, By: Carol, IP: [74.93.198.9]

L2: Pymt from 2 custodians for one SEPPThanks for the reply with the additional info. Sounds like your 2-IRA plan should work pretty smoothly with the constant dollar amount coming from each account. Educate your client to expect to file Form 5329 each year. If they use Turbo Tax it will take care of generating the required form. If they use a tax preparer, then you have to educate two people.
One last suggestion for monthly distributions. Set the distributions for the 5th of the month and use EFT directly into the client”s bank account. I have found that once it is set up and running smoothly, rarely do you have any hicups from the VA company. Likewise, if the MF account is with a fund sponsor, the EFT”stend to work well too. However, if the funds are in a brokerage account, then this has a lot of moving parts and tends to have more problems and must be watched closely. The best thing to happen is when a distribution is missed and the client discovers it, then theywill watch things much closer and will let you know quickly when there”s a problem.
Jim2008-01-17 08:10, By: Jim, IP: [24.252.195.14]