Recalculation on Amortization plan
L1: Recalculation on Amortization planI’ve been reading this board off and on for about 10 years now. You guys do a great job.
I’m getting ready to pull the trigger on my own 72t plan, finally!
Rate: 2/1 rate of 2.53%
Start: in days
Age: attained age = 53.0
Trad IRA on 2/28: 76,907.35 yields 3,578.93
Rollover (old 401k) IRA on 2/28: 740,101.26 yields 34,441.10
My question really is on recalculation for an amortization plan. I realize there are 3 PLRs allowing its use. I thought I read years ago, perhaps in planning pointers, that the recalculation method is thought of now as a reasonable method for general use, other than say the 3 specific PLR’s. I would like to use therecalculation method each year, but am not too interested in investing in a personal PLR.
Thoughts on using Amortization method with recalculation using new age, rate and value each 2/28 date, without getting another PLR.2017-04-12 19:01, By: JohnO, IP: [188.8.131.52]
L2: Recalculation on Amortization planNo reason to seek a PLR, but the IRS sees very fewrecalculated plans and the varying annual distribution may well generate an inquiry. If there is an inquiry the execution of the plan must be 100% correct.
A recalculated plan must update all 3 variables (age, value and interest rate) on the same day each year. Since SEPPs are basically calendar year plans, that date should be 12/31 each year with an exception for the first year, which can be treated as a stub year. Since your SEPP universe includes two IRA accounts, you must value them on the same date so if you want to use 2/28, you must also use the Feb interest rate, and your age attained by Dec, 2017. While you could use the higher March rate for a plan starting in April, in order to adhere to the same date for all variables, it is safer to use that Feb. rate. You can either distribute 9 months or 12 months worth for 2017. Then move to a 12/31 valuation date for the remaining years. If you do not use 12/31 you should not be taking any distributions in those years earlier than the date you use. Simpler and fewer restrictions are better, so you should move to a 12/31 calculation/valuation date for the following year’s calculation. Of course, you will be doing a new calculation every year, so not only does each calculation have to be correct, it must also be consistent date wise with all the prior years in the plan. Keep a clear documentation of each year’s calculation.
Note the recalc will result in considerable variations in your distribution from year to year including the possibility of a major reduction if your valuation drops as a result of market losses. Therefore, this suggests avoiding volatile investments in these two IRAs.
2017-04-13 00:20, By: Alan S, IP: [184.108.40.206]
L3: Recalculation on Amortization planUnless you absolutely need $ 38,000 a year until you are 59 1/2, I would suggest using only the converted 401-K, and keep the other IRA account with $ 79,000 separate for emergencies, or to start a 2nd SEPP with $ 50,000, and keep $ 29,000 for emergencies.2017-04-13 00:58, By: dlzallestaxes, IP: [220.127.116.11]
L3: Recalculation on Amortization planAlanS, thanks for the response. You threw me on the Feb then ‘change’ to 12/31, but I understand the logic. It just rubs me the wrong way for the no changes. I was prepared to do all with Feb data every year.
Let me restate what I believe you said.
This year, Feb rate (2.53%), 2/28 value (each IRA) and attained age that date year(currently 53), do the math and that’s it. For this year I would no prorate.
Then sometime next year (2018 likely early), use Dec ’17 rate with 12/31/17 value, with 12/31/17 attained age (still 53), do the math etc.
That all sounds reasonable, just moving from 2/28 to 12/31 threw me.
DLZ, I kept the IRAs seperate to avoid stupid adding mistakes with the 2 different accounts. Its the same brokerage and all, but wanted one piece of paper (each one) with the value on it. I have a RIRA and spouse has a TIRA and a RIRA, plus taxable account which is my non SEPP emergency fund. The idea to keep some in reserve was one I got from you guys.
2017-04-13 02:09, By: JohnO, IP: [18.104.22.168]
L4: Recalculation on Amortization planJohn, for the age portion you should use the age you will attain in the 2017, and even if then move to a 12/31 calculation date for 2018, you would use your age as of the end of 2018. Each year your age increases by 1, but you should start with your age at the end of 2017.
You could stay with the Feb 28 date if you wish, but then you should not take any distributions in January or February (before you do the recalc for the year). That is why it is simpler to align the calculation with the calendar year, which is how your distributions are reported and I assume your taxes are filed.
Your distribution pattern does not matter, so you can take quarterly distributions or any other pattern and you can change that from year to year. But your 1099R needs to match your recalc every year.2017-04-13 03:27, By: Alan S, IP: [22.214.171.124]
L5: Recalculation on Amortization planOne final question, hopefully.
I thought of this and then forgot about it. Leap Years in 2020 and 2024! Since I’m on 2/28 and let’s assume I want to keep it safe and keep everything based on Feb for each subsequent years. On leap years, would or should I do the value on 2/29. Certainly, for me, that is preferable as the brokerage will also have a statement on file for 2/29.
Hopefully, my attempts to keep it simple are not complicating it.
2017-04-13 13:12, By: JohnO, IP: [126.96.36.199]
L6: Recalculation on Amortization planAs long as you are consistent, it should not be a problem. You could either use 2/28 every yearor document your plan from the beginning that you are going to base your calculations on the last day of February. In that latter case, you would use 2/29 for leap years. The last day of the month is preferable because your custodian would likely provide a monthly statement you could copy on line. A 2/28 statement will not exist on leap years.
The IRS wants the annual calculation to be done such that all 3 factors are updated simultaneously, but you still would have flexibility on the interest rate. You could either just use the published Feb rate each year or you could use the higher of the January or Feb rates because a basic calculation gives you that flexibility. Recalculation would not eliminate that option, but again document your assumptions up front and if you are going to use the higher of the Jan or Feb rates be sure to do that for every calculation.2017-04-13 18:23, By: Alan S, IP: [188.8.131.52]
L7: Recalculation on Amortization planAlan… if the recalculation date/distribution date is 02/28 of each year, wouldn’t the appropriate SEPP rate be for December or January… either of the 2 months immediately preceding the distribution date? I don’t believe the calculation interest rate changes because it is a re-calculation.
2017-04-14 01:16, By: Gfw, IP: [184.108.40.206]
L8: Recalculation on Amortization plangfw, I am getting much of this guidance from Bill Steckers treatise from 2004. He recommends moving the recalc date to 12/31 to align better with the CY, but also indicated that any other date could be used as long as no distributions were taken in a CY prior to the calculation date.
I indicated that if OP wants to stick with the last day of Feb as the recalc date, there should be no distributions taken before that date. I should also have included the last day of Feb in stating this, so the first distribution would not be prior to March if OP continues to recalc as of the last day of Feb. As such, the Feb or January rate would apply.
Obviously, the interest rate for the initial calc must be based on either of the two prior months to the first distribution. For subsequent years, some questions surface. For example if the Jan or Feb rate is used, does this mean that the first distribution must be done in March or April? This same question would apply even if the OP reverted the recalc date to 12/31 as Bill recommended. Bill did not comment on what month’s interest rate would apply there, but I presume the same two month period would apply, ieeither the Nov or Dec rate if the first distribution of the upcoming year is in January. Am not aware if any of the post 2004 PLRs revealed IRS thinking on this, but my guess is that whatever assumptions are made with the initial year must be continued throughout.
I tend to think recalc is risky, will attract more IRS attention, and may produce unstable annual distributions, so would not recommend going there.2017-04-14 03:05, By: Alan S, IP: [220.127.116.11]
L9: Recalculation on Amortization planAlan S… thanks for the additional clarification – 100% agree.2017-04-14 09:13, By: Gfw, IP: [18.104.22.168]