L1: separate IRA”sI have a 401K with over $1,000,000. I am 51 yrs age. I have most of my wealth in my IRA. I am interested in retiring (actually changing careers)and have been told about the 72T. I asked my broker and he gave me the idea of spliting the money between IRA”s for emergency money. I have been reading up on it and reading your posting. I am trying to make sure so I make nomistake (costly from what I am reading).
Can I rollover lets say $900,000 into a IRA make the SEPP”s on this amount. Have the $100,000 transferred to another IRAand use as emergency funds. Now I need $20,000, in the 5th year, knowingI have taxes and a10% penalty, will thiscause me to have a penalty on the $900,000 distributions, going back since inception.
Also, do I base my SEPP on the aggregate $1MM or $900K, where I am taking the SEPP from. Being told on the $900K.Hopefully, I have explained what I am trying to accomplish. Thanks for the help.2008-05-23 11:16, By: Tom, IP: [184.108.40.206]
L2: separate IRA”sTom,Yes, you can partition your 401k funds into any number of IRA accounts you wish and use the reverse calculator to determine how much of a balance you will need to fund a SEPP that will last till 59.5. You are on the right track there.
For example, if the SEPP calculations allow you to distribute 6% and you need 48,000 to meet your needs, then you need an 800,000 IRA from which to fund the SEPP. Since a 401k plan can limit their transfer to one account, you transfer by direct rollover the entire amount to an IRA, then transfer 200,000 out of that IRA leaving 800,000 from which to start your SEPP. The 200,000 could be used for emergency purposes or even to start a second SEPP plan a few years later if you knew your additional needs would be consistent rather than a one time emergency.
Amounts you take from the 200,000 IRA would be subject to penalty BUT this would not affect the SEPP from the 800,000 IRA and those amounts would continue to be penalty free if you met the exaxt requirements of your SEPP. Now let”s say at 56 you need another 6,000 per year for 3 years. You can partition your 200,000 IRA into two 100,000 accounts and start a second SEPP from one of them and still have a 100,000 IRA for emergency needs. I think you get the picture.
I assume in your post you meant to say that most of your wealth was in your 401k, but you indicated IRA which would mean that you had more in an IRA already than in the 401k and I do not think that is what you meant.
Finally, if you happen to have highly appreciated employer stock in your 401k, you may have the potential to use NUA and avoid the SEPP or delay the SEPP while you sell the shares and pay only the lower LT cap gain rate upon sale. The cost basis would be taxable in the year you distributed the shares. You should always look into NUA before doing an IRA transfer, because an IRA transfer forfeits the use of NUA permanently. To use NUA, you must execute a qualified lump sum distribution from your your employer plans of a similar type.
2008-05-23 17:31, By: Alan S., IP: [220.127.116.11]
L2: separate IRA”sAn observation, and a related question. Alan states that the reverse calculator indicates that you need to invest $800,000 at 6% to provide the $ 48,000 per year that he used in his example. If that is so, then the reverse calculator is designed to assume that there will be no reduction in the principal in the SEPP 72-T account.
I think it would be a viable alternative for taxpayers to consider putting less into the SEPP 72-T, and that the annual distributions come from a combination of income and principal. If, for example, you put only $ 400,000 at 6% into the SEPP 72-T, then it would generate $ 24,000 per year in income. The additional $ 24,000 would come from principal until age 59 1/2 or 5 years, whichever is later. If someone was 51 1/2, then they would have 8 years and take $ 192,000 (plus the amount that the interest would be reduced on the principal withdrawn, which let”s say is another $ 8,000). So the $ 400,000 would be reduced to $ 200,000 in principal in the SEPP 72-T, but meantime you would have had an extra $ 400,000 in your other emergency IRA, that would have been growing at let”s say the same 6% rate/year, or $ 24,000 for 8 years or $ 192,000 ( plus the interest income on the income, or say another $ 8,000). So the SEPP 72-T would have $ 200,000 left, and the “emergency IRA” would have $ 600,000, or a total of $ 800,000, which is the same as the reverse calculator”s approach. BUT, you have $ 400,000 less at risk for the 10% RETROACTIVE PENALTY on the CUMULATIVE DISTRIBUTIONS.
Please explain why my approach is flawed, or less valid than the “traditional” approach.
P.S. All discussions about SEPP 72-T forget to include a comment that the amount that must be withdrawn to meet specific dollar NEEDS must be INCREASED by 1/3 in order to provbide for the 25% FEDERAL INCOME TAX on those distributions. ( If the taxpayer had these funds available outsie of their SEPP 72-T or IRA, would probably not have been using a SEPP 72-T in the first place, or would be using a lower invested amount.)
P.P.S. — THINKING OUTSIDE THE BOX — If you are changing careers, and might go to work for another company with a 401-K plan that might accept a rollover of your present 401-K, and NUA is not a consideration, you might want to defer rolling over your 401-k to an IRA until you determine where you will be. Also, if you might set up your own company, and therefore set up your own 401-K plan there, then you could make sure that you can roll your present plan over to your own newe 401-K plan at some time in the future. Further, recent changes in the IRS code now permit IRAs to be rolled over into 401-k plans, so even if someone made the mistake of rolling over a 401-K into an IRA in the past, they might be able to reverse that mistake if they went back to work with a company that would accept it, or starting his own company and plan.2008-05-23 18:39, By: dlzallestaxes, IP: [18.104.22.168]
L2: separate IRA”sresponse to DLZ”s question:Please explain why my approach is flawed, or less valid than the “traditional” approach.
Dlz-Alan”s example hada $48k amortization payout per year on an $800k SEPP, starting at age 51. In your example, you use a $400K SEPP and thus have him withdrawing only $24k (Max allowed at his age and current interest rate of 3.57%), so where would he be withdrawing the”principal” that made up the other $24k per year in your example to get to $48K total on this $400k SEPP. If the SEPP plan only can support the first $24K, due to the lower starting balance of $400k,will he pay 10% penalties for taking the other $24k from the other Non-Sepp IRA each year? I guess I am not following your logic.BTW- The 6% withdrawal that Alan eludes tois the computed withdrawal (48/800) based on the Amortization table result of being able (at current 3.57% rate) to take out $48K per year on an $800K SEPP at age 51, and has nothing to do with the yield of his investments as I see it. KEN2008-05-23 19:53, By: Ken, IP: [22.214.171.124]
L2: separate IRA”sI can understand keeping the partitioned SEPP account as small as possible, but like Ken so not know where that principal amount would come from if not another IRA subject to penalty.
It appears this boils down to that frequent question of whether a taxpayer, most often a retiree, should really spend down his taxable assets before tapping retirement accounts or whether he should attempt to better fill out tax brackets by selectively tappinga mix of both at the same time. There have been some rather inconclusive studies on that issue, and it appears to me that the answer depends on a whole raft of assumptions and variables not unlike whether someone should convert to a Roth or not. It should be mostly tax driven, making use of lower brackets each year and reducing use of excess brackets.
I agree that if someone does control taxable assets it can well enable them to partition the IRA to be used for the SEPP into an amount that will only fund a desirable portion of expenses, and not to automatically set up the SEPP account to provide all needs as that would be wasting tax deferral potential. I also believe that in order to avoid a SEPP, someone should not exhaust all their taxable accounts in their entirety like many people probably do before discovering the SEPP solution.
Tom posted that he had most of his assets in the 401k, and therefore the SEPP would probably provide the bulk of his living expenses, of which taxes would be a large part.2008-05-23 20:40, By: Alan S., IP: [126.96.36.199]
L2: separate IRA”sI think I understand it better now. The reverse calculator determines the amount to set aside in the SEPP 72-T using up to 120% of the federal interest rate to be able to withdraw the annual figure desired. Since the income will almost always exceed that 120% of federal rate, you will alwys be taking out only income, and never principal, unless the income is less than that rate, and you need some principal to maintain the annual distribution figure.
Too bad. I was trying to relate it to the situation where retired people traditionally say that they have to “earn” a certain rate on they retirement funds, when what they really mean is that hey need a “cash flow” of a certain amount, and we know that it does not matter in that case whether it comes from interest, dividends, cash gains dividends, or capital gains, or appreciation, or sale of investments. I obviously “mis-thought” too much “outside the box”.2008-05-23 22:16, By: dlzallestaxes, IP: [188.8.131.52]