Question on 72T
L1: Question on 72THave a couple of questions that I was hoping to get some clarity on.
Leaving my job in mid July of 2012 (due to forced relocaion).
Have a 401k worth about $320k (all pre-tax), and a lumpsum pension payment of $390k.
Was planning to roll both into a single IRA with Fidelity, in order to
take SEPP payment distributions, as I need about $29k per year to make ends meet. In order to get the $29k per year, I’m thinking that I’ll need to combine both the 401k and the lumpsum in order to obtain the $29k, otherwise I’ll have too little. (I’m currently 53 years old so leaving it in the 401k probably wouldn’t do me any good in terms of getting any distribution since it would be taxed the 10% penalty).
Figure it’ll take a month or two to get the amounts rolled and
my IRA set up, but I’m hoping to be able to take my first SEPP payment in October 2012.
As a backup, I have a separate inherited IRA worth about $70k to
cover emergencies, so I’m hoping that I wouldn’t have to bust
the IRA that I would be taking the SEPP payments from.
Q1) What date can I use for the IRA balance to compute my SEPP payment on (thinking of using the amortization method) ?
Q2) What is the date that i would use for the interest rate to calc
the amortization method ?
Q3) If I’m not quite sure initially of the direction of the investment for the IRA, can I have the IRA placed in cash or a money market type invested IRA until I decide later where I want to invest it, and would those investment direction changes cause a bust on the IRA in any way ?
Q4) I know Fidelity has informed me that they can do the SEPP computation, but your site advised that I should calculate it on my own. What’s the best way to confirm the exact calc ?
My current tax person has no idea of the 72T SEPP formula.
Any other considerations ?
Thanks so much for your advice.
2012-06-03 16:37, By: rjt, IP: [188.8.131.52]
L2: Question on 72TSuggest that you start by reading our Planning Pointers- they will answer some of your questions. Here are my thoughts…
Q1. Any date that you can document after the SEPP IRA has all the funds from both the 401(k) and the pension.
Q2. The interest rate is determined by the SEPP effective date which is the date of the first distribution. You an find more on interest rates HERE.
Q3. Per the Planning Pointers, use a brokerage account and you have flexibility in determining the SEPP investments without having to worry about partial transfers, etc.
Q4. You can use our calculators or have Fidelity do the calculations. The results should be the same once you know the final balance and the interest rate that you will be using.
You still have time to do some reading and learn what you can. Just remember that regardless of who does the calculations, a SEPP is between you and the IRS so you need to know what you need to do to start the SEPP, when the SEPP will end and what documentation you need to keep. 2012-06-03 17:25, By: Gfw, IP: [184.108.40.206]
L3: Question on 72TI calculate that your max distribution would be 24,756 if you could complete the rollovers and take your first distribution by 7/31. After that the max interest rate drops considerably and will further reduce your annual distribution by a little over 1,000.
I don’t know exactly how long it will take to complete the rollovers, but if your separation date is set, perhaps you can start the process before leaving. At least have the Fidelity IRA set up. And remember that regardless of which month your first distribution occurs, you can take out your full annual amount in 2012 and you may need that to offset the lower SEPP annual payments.
The reduced amount means that you may have to tap your inherited IRA to supplement your SEPP payments, so you are lucky to have the penalty free inherited IRA.
Also, note that the calculation from Fidelity may differ slightly from this site as I recall that Fidelity uses the distribution frequency (eg monthly, quarterly, annual)to affect the payment whereas we consider that factor to beimmaterial.
You are not getting a severance benefit and do not plan on finding other work?
2012-06-04 00:02, By: Alan S., IP: [220.127.116.11]
L4: Question on 72T1. How old are you/What is your date of birth ? If you are, or will be, 55 or older during 2012, then you do not have to roll over your 401-K to an IRA, or even set up a SEPP 72-T, if your comapny allows partial distributions in varying amounts as you need them in 2012 and future years.
2. Is there any company stock in your pension plan or 401-K ? Comppanies usually make their contributions in company stock. If so, then ask your company for the NUA ( “Net Unrealized Appreciation”) Cost Basis for your account(s). This will probably change your approach, if applicable for either or both of your company sponsored retirement accounts.
3. Change tax professionals. You need one who understands SEPP 72-T and NUA.
4. Have your new tax professional do some tax planning based upon your known taxable wages and income for 2012, and deductions, and then determine your cash flow and tax situation for 2012 and then future years. If you will be in a 15% tax bracket for 2012, then have him determine what the tax impact will be if you take a full annual distribution, or various prorata distributions based upon when you start. Take into consideration that if you can take “extra” money by using the annual amount at 15% in 2012, then the extra money can help any 2013 shortfall. On the other hand, if the “extra” money pushes you into the 25% tax bracket, then you might want to jsut take a lower prorata amount in 2012, especially if you can be taxed at 15% in 2013 and future years. This type of PLANNING is imperative, and must be done by a knowledgeable tax professional.2012-06-04 00:34, By: dlzallestaxes, IP: [18.104.22.168]
L5: Question on 72TDLZ,
Re: your #1 comment, he had stated the following in his initial post:
Leaving my job in mid July of 2012…
(I’m currently 53 years old so leaving it in the 401k probably wouldn’t do me any good in terms of getting any distribution since it would be taxed the 10% penalty).2012-06-04 02:45, By: Ken, IP: [22.214.171.124]
L6: Question on 72TSorry, I missed that item in parentheses. I had looked for it near the beginning.2012-06-04 04:57, By: dlzallestaxes, IP: [126.96.36.199]
L5: Question on 72TThanks for your advice dlz,
Based on my age, I don’t think the 401k will be an option for me
since I’m under 55 and need the income.
I think I probably will find another tax person (as you suggested).
2012-06-04 05:05, By: rjt, IP: [188.8.131.52]
L4: Question on 72TAppreciate your response, Alan, and the heads up on the estimated amount.
Yes, I may have to take the full annual amount in 2012 to help
offset the lower SEPP payments.
I am getting a severance, however the taxes are pretty high on it, and
I’m using that to payoff outstanding credit and cover a few months, until I can find other work.
Thanks for your advice.2012-06-04 04:58, By: rjt, IP: [184.108.40.206]
L5: Question on 72TIf your taxable income for the year will be in the 15% tax bracket, then you might want to reduce your federal income taxes withheld.
Also, you might want to delay paying off your credit card debt until 2013 and not use all of the 2012 income to pay it off.
If you expect to get other work, then you should look in the future to reduce your future years’ distributions by changing to the other method under the one-time change rule.
Remember that you will be required to remain in this SEPP 72-T plan until 59 1/2, unless you voluntarily bust it, and pay the 10% penalty on your distributions until then.
These are reasons to have an experienced tax practitioners to guide you thru all of the nuances over the next few years.2012-06-04 05:07, By: dlzallestaxes, IP: [220.127.116.11]
L3: Question on 72TThanks for the input.2012-06-04 04:59, By: rjt, IP: [18.104.22.168]