Recalculating SEPP yearly based on Life Expectancy
L1: Recalculating SEPP yearly based on Life ExpectancyFrom reading some of the IRS Private Letter Rulings, it seems that an individual can recalculate their SEPP IRA distributions yearly underthe Amortization methodbased on the Life Expectancy Table.By doing so,would not the withdrawal amounts increase based on age? Also, by doing this would not the Mid-Term rate adjust yearly, either up or down.
How would you document this method to IRS? It seems that recalculating yearly might be the better option.I intend to rollover a 401K to Vanguard and they, per their SEPP IRAinformation kit,will not report on the IRS 1099-R form that the distribution was qualified for an exception to the 10% penalty rule. They indicate having to file a Form 5329 instead and reflect it there.
Can you provide any opion or advice?
Dave B2008-05-14 15:28, By: Dave B, IP: [184.108.40.206]
L2: Recalculating SEPP yearly based on Life ExpectancyYou would document it by keeping very good records.
For example, each year after the first you could recalculate based on the previous 12/31 balance, the attained age in the year the distribution occurs and the highest of the previous Nov or Dec 120% mid-term rate.
Will the distribution always go up – no. It could go up or down. It could even go up next year and down the year after. Onceyou determine to recalculate, you must recalculate every year.
2008-05-14 15:41, By: Gfw, IP: [220.127.116.11]
L2: Recalculating SEPP yearly based on Life ExpectancyHello Dave:
I am (kinda) getting the impression from your post that you think that one can annually recalculate just by updating the life expectancy (LE) or LE plus interest rate. That is incorrect& I apologize if I read something into your post that is not there. If one recalculates, it must be done on all three variables in the amortization formula and must be done every year starting with year 2 until the SEPP plan is completed.
[email protected] 2008-05-14 16:05, By: TheBadger, IP: [18.104.22.168]
L2: Recalculating SEPP yearly based on Life ExpectancyHello, Dave:
Great advice from Gfw and TheBadger, as always.
To this I would add that when I set up my SEPP, I wrote a 1-page letter to myself stating exactly what I was trying to do, how the SEPP was to be set up, and the calculation method to be used. I placed this letter in the very front of a 3-ring binder that I use as my SEPP documentation. It contains every scrap of paper and printouts of every piece of electronic correspondence / info that has anything to do with my SEPP. It is organized by section, so just about anything in there can be found quickly. I am hoping never to be audited by the IRS but if I am, I will have all of the info available and in a format that is easy to use.
As for Vanguard, I have my SEPP with them and it has worked out well for me. They will not correctly code a 1099-R, however. IMHO, they are “whistling past the graveyard” on this one. The IRS gave them an out on 1099-R coding by saying something like “if you know that a SEPP is in progess, you must code box 7 as a “2”. If not, then a “1” is appropriate. Like Sgt. Shultz in the old Hogan”s Heros TV show, Vanguard”s position is that they “know nothing”, so never report a SEPP correctly. They leave that to their clients viaform 5329. While this works, it is a minor annoyance. By the time the IRS and the custodians resolve this bit of wordsmithing, my SEPP will likely be done. My questions to Vanguardare “Why did I fill out that 7 page SEPP form and why are you sending me the exact same amount of money from that account every quarter, if not for a SEPP? They would likely shrug and say “We don”t know!”. :-/
Other than this one aberration, they seem to do a pretty good job over all.Ed2008-05-14 17:43, By: Ed_B, IP: [22.214.171.124]
L2: Recalculating SEPP yearly based on Life ExpectancyI agree with the comments of the others.
In addition, since the amounts can go up or down based upon the value of your investments, are you willing to trust the 100% complete accuracy of all calculations that you make from now until the later of 5 years or 59 1/2, and the ability of your broker or mutual fund company to properly change the amounts each year, and your remembering to double check the figures every December ?
Also, remember that if you take monthly payments, they would have to be late enough in each month so that you will have time to get the 12/31 valuation, make your new calculation, and get it to the company to make the correct new payment.
Further, at the end of the year, will the Dec. payment be made early enough that if the total of all of your paymentts will exactly equal the ever-changing annual figure for that year ?
Remember that any error in any year before the 5-year 59 1/2 date will result in a 10% RETROACTIVE PENALTY ON THE CUMULATIVE DISTRIBUTIONS FROM THE BEGINNING.
I don”t think it is advisable to follow your strategy when you take all of the above factors into account.2008-05-14 18:07, By: dlzallestaxes, IP: [126.96.36.199]
L2: Recalculating SEPP yearly based on Life ExpectancyI agree completely with DLZ. IMHO, the best way to run a SEPP is to do your homework on it so that it is set up correctly, keep it as simple as you can, keep good records, and don”t attract unwanted IRS attention. If you can do these things, the chances of having a successful SEPP are greatly improved.
Ed2008-05-16 10:28, By: Ed_B, IP: [188.8.131.52]