Question regarding amount of 72t withdrawal using Amortization Method

L1: Question regarding amount of 72t withdrawal using Amortization Method Questions:
New SEPP for 52.5 yr old with expected distribution to start in approx. 2 wks.
1) If I use the Amortization Method for calculating the 72t SEPP withdrawal from an IRA, do I have to withdraw the exact amount calculated with account balance/mid-term rate, or can I withdraw an amount less? If the calculation comes out to 10,545 can I withdraw 9,000 or does it have to be exact amount?
2) The amount is the same until 59.5, correct?
3) What account balance is exceptable to use for Amortization method, is a March 31 account balance exceptable for a withdrawal to start in 2 weeks or so ?
Thanks.
2012-06-18 15:12, By: Joe G, IP: [64.132.65.106]

L2: Question regarding amount of 72t withdrawal using Amortization Method See my responses to your questions below:
1) If I use the Amortization Method for calculating the 72t SEPP withdrawal from an IRA, do I have to withdraw the exact amount calculated with account balance/mid-term rate, or can I withdraw an amount less? If the calculation comes out to 10,545 can I withdraw 9,000 or does it have to be exact amount?
You MUST withdraw the exact amount TO THE PENNEY! Rounding as your have suggested will result in an automatic and immediate busted plan.
2) The amount is the same until 59.5, correct?
Short answer — yes. Longer answer: If you choose to do “amortization with recalculation” then your amount will change each year, but this opens a whole new can of worms. For your extended SEPP Plan (atleast 7 years), keep it simple and stick with the same, calculated amount from year to year.
3) What account balance is exceptable to use for Amortization method, is a March 31 account balance exceptable for a withdrawal to start in 2 weeks or so ?
An account balance on March 31 would PROBABLY be acceptable. However, since the marketdroppedsignificantly after Marech 31, then you might need to use a more current balance. You didn’t tell us the difference between your March 31 and current balance, so we can’t say with any degree of certainty if it is acceptable.If you have an “acceptable” withdrawal calculationwith theIRS’s viewpoint, you might have a withdrawal rate that is not sustainable from an investment point of view. My suggestion is to evaluate your withdrawal rate with this in mind. Seek professional financial advice if you are not sure.
Jim F2012-06-18 15:55, By: Jim F, IP: [70.167.81.119]

L3: Question regarding amount of 72t withdrawal using Amortization Method Thanks Jim, for the answer to #1 !!!
The account is down about 5% from March 31, the withdrawal calculation using amortization method works out to about 4.5% of the account balance. Withdrawals would be for 7 yrs.2012-06-18 16:17, By: Joe G, IP: [64.132.65.106]

L4: Question regarding amount of 72t withdrawal using Amortization Method If you’re only down about 5% then your March 31 account balance should work just fine for the SEPP Plan, amortization calculations.
Generally a withdrawal rate between 4and 5% of your account is probably OK for a well diversified, “Growth and Income” typeinvestment portfolio. Of course if you are 100% in bonds or CD’s with today’s rates, it probably won’t work.
Since this site is about how to establish and run a successful SEPP Plan and not about investment concepts, hopefully GFW will leave my little paragraph above alone and not delete it.
Jim F2012-06-18 16:26, By: Jim F, IP: [70.167.81.119]

L4: Question regarding amount of 72t withdrawal using Amortization Method 5% should not be a problem, since markets can move that much in a week.
However, your first distribution “in about two weeks” could turn out to be either a June or July distribution. While you can use the 1.57% interest rate in either case, you need to know the month the initial distribution was made, ie date distributed, not date received). This is particularly critical if you choose to pro rate the annual amount for 2012.
Also, note that there can be no contributions or distributionsfor the IRA account used for your SEPP between the date you use for your initial balance and the date of your initial distribution.
If you set up periodic payments, stay away from dates that fall very early or late in the month, to allow time to correct any errors made by your custodian.
2012-06-18 16:31, By: Alan S, IP: [24.116.67.233]

L3: Question regarding amount of 72t withdrawal using Amortization Method There are many nuances to SEPP 72-T planning.
I suggest that you review the “pointers” on this website, get the book and read it thoroughly, and get professional advice.
For example, separate you present IRAs into 2 accounts, using our “reverse calculator” to determine the amount for your FIRST SEPP 72-T account. Transfer the balance to a SECOND IRA account for future emergency funds, in case you need more money in the future.
If you get a job or other income/money/inheritance in the future, you can reduce the annual distribution as a ONE TIME adjustment.
In the first calendar year (2012), you can take EITHER the ANNUAL DISTRIBUTION or a prorated amount based on the month you start. This may depend upon your 2012 tax situation, but if the additional amount is in the same tax bracket as you will be in next year, then that extra amount can be a buffer for future needs without starting the 2nd plan, or busting this first plan.
As Jim F suggested, give us more info, such as your 2012 taxable income without the SEPP distribution, your highest IRA balance from 12/31/2011 to date, your 3/31 and 5/31 balances, and your cash flow needs, plus federal and state estimated/withheld taxes on these distributions.
2012-06-18 16:25, By: dlzallestaxes, IP: [71.175.95.64]

L4: Question regarding amount of 72t withdrawal using Amortization Method All thanks for the info/responses. The withdrawals will still keep us in the 25% federal tax bracket, taxable income right now around 130K for married couple. Live in Illinois where retirement income is NOT taxed so should not have a 5% state income tax, until the state gov’t decides to change that.
Distribution will be used for college expenses. Son starts in the fall, and daughter 2 years after that. Setup a UTMA account in 2000 but growth has been virtually non-existant and need more cash to help pay college costs.
Thought about home equity loan, but right now we only have about 35-40% equity in home and don’t want additional payments. 2012-06-18 18:01, By: Joe G, IP: [64.132.65.106]

L5: Question regarding amount of 72t withdrawal using Amortization Method If you had spoken to your accountant or a tax professional, they would/should have told you that FORM 5329 exception #8 allows “Distributions to the extent of Qualified Higher Education Expenses for the year of the taxpayer, spose child or grandchild”. These expenses include Tuition and fees, books, supplies and equipment required for enrollment, and room and board, if at least 1/2 time attendance.
So, your distributions would be exempt from the 10% early distribution penalty WITHOUT HAVING TO SET UP A SEPP 72-T PLAN !!!2012-06-18 20:15, By: dlzallestaxes, IP: [71.175.95.64]

L6: Question regarding amount of 72t withdrawal using Amortization Method Thanks dlzallestaxes for the insight, I thought I had read somewhere that IRA withdrawals were subject to the 10% penalty for college tuition expenses.
Can a 401K withdrawal be made penalty free (only taxes) for college tuition?2012-06-18 21:28, By: Joe G, IP: [64.132.65.106]

L7: Question regarding amount of 72t withdrawal using Amortization Method No, qualified employer plans do not include the penalty exception for higher education costs. Of course, if you have an old 401k, you can roll it over to an IRA to get this exception.
It would be better if you could handle these unpredictable college costs with the education exception as opposed to the relatively inflexible SEPP plan that could drain more of your retirement account than you need. But you can also use a combination of the two exceptions if you choose.
You also might want to read up on the Benz case which resulted in IRS approval of a penalty waiver for additional higher education distributions than allowed under the SEPP. But I would not recommend relying on one PLR unless there is a considerable benefit vrs other options. If you partition your IRA into a non SEPP and SEPP account, you could combine the two exceptions to get to the desired result without depending on the Benz case. For info on Benz click on “Articles” and it’s the 4th one listed.2012-06-18 22:54, By: Alan S, IP: [24.116.67.233]

L8: Question regarding amount of 72t withdrawal using Amortization Method You did not mention that you had a 401-K. FYI, if you plan to retire, or terminate your employment with this employer in the year that you will become 55 by 12/31 of that year, then you can use the exception that your distributions from a 401-K under those circumstances are also exempt from the 10% early distribution penalty.
Also, if there is employer stock in yhour 401-K, or a pension/profit-sharing plan, then ask your HR department about the NUA Cost Basis, and review the postings on this website if this applies to your situation also.
By the way, with the other options mentioned in the various responses, I would not use the Benz case in your situiation.2012-06-18 23:56, By: dlzallestaxes, IP: [71.175.95.64]

L7: Question regarding amount of 72t withdrawal using Amortization Method Your answers are the reverse of what the regulations are.
There are no exceptions that allow 401-K distributions for education.
IRA’s are the only plans that have an exception to the 10% early distribution penalty for Qualified Education Expenses.
As Alan stated, you can transfer part of your 401-K to an IRA, and THEN make penalty-free distributions from the IRA for the education expenses.2012-06-19 00:01, By: dlzallestaxes, IP: [71.175.95.64]