sepp (72t) newbie

L1: sepp (72t) newbieHi, I cant believe my luck tripping across this website last night while researching this subject, I have been talking with my accountant about my intention to set up and begin early level withdrawals from my IRA….I turned 55 in Jan 2011, I retired (stopped working) in Jan 2011…I have only one IRA, it has a current value of 770k today, previous months account values were: Feb 727k, Mar 735k, Apr 759k..I understand the 120 Midterm rate is 2.98%, in my calculations I used 2.9% (to be conservative) and I took average of last 4 months account values and came up with 747k…According to calculations, age 55, 2.9%, 747k, results if using annuitization method = $37,786….if using amortization method =$37,941……I have the account with TD Ameritrade and was planning on instructing them to pay out monthly $3,000….$36,000 annual…I assumed it is okay to use a number less than the maximum but wanted to run this by those with much more experience..Is it that simple or am I missing something? Is it okay to use 4 months average account value? I do not need any of the money in the next 6 months and have the option of waiting if it makes more sense…I could also receive payments quarterly or annually if it is better….Any help most appreciated, Bill2011-05-20 17:08, By: bill j, IP: [24.122.159.146]

L2: sepp (72t) newbieStart by reading our planning pointers at http://72t.net/72t/Planning/Pointers
If all of your funds are in one IRA, consider breaking the account into 2 accounts and using one account for emergencies. If you have other funds available, this may not be necessary.
Use an account balance that you can document – don’t use an average, use an exact amount that you can document by using one of your account statements or by printing a statement from the web.
Use the exact amount that the calculator illustrates, not some amount that you pick out of the sky.
A SEPP isn’t based on averages or estimates, it is based on exact numbers, and in an audit, you my have to document how the initial calculations were determined by providing a sample of the calculations and the assumptions that you used.

2011-05-20 17:51, By: Gfw, IP: [24.148.10.164]

L3: sepp (72t) newbieYou did not say whether or not you had a 401-K/403-B for this employer. If so, that can affect your approach.
If you will not need any money the rest of this year, you might consider waiting until later this year, maybe even until Nov to start taking distributions. Then you could take 2/12 (if Nov start), 1/12 (if Dec), 1/4 (for 4th qtr), or even the full 12 month amount ( to supplement future years), especially if you will be in the 15% tax bracket for 2011.
There is considerable TAX & CASH FLOW PLANNING that should be taken into consideration.
Of course, the other consideration is that the sooner you start the SEPP 72-T, the sooner you will finish it after reaching the 5-year point after you are 59 1/2.2011-05-20 19:27, By: dlzallestaxes, IP: [96.227.217.194]

L4: sepp (72t) newbieYou may have been confused on the issue of taking less than your annual distribution because you CAN use an interest rate lower than the max rate, but whatever interest rate you use to generate the annual amount requires that you withdraw that exact annual amount.
Also, I think dlz meant to indicate that if you wanted to withdraw 1/4 of your annual amount, your first distribution must be in October. That is the only way you could take out 1/4 of your annual.
As gfw stated, do NOT use an average account balance. Select an exact date for your account balance and use that exact balance. Do not use a date more than 6 months before your start date and also do NOT use a balance that is more than 15% different than the value when you start your plan. Your account balance selected must be representative of the current balance and 15% is just an arbitrary guess on my part as to where the IRS might think your account value was NOT representative. As we remember, the markets are quite capable of dropping 15% in a 30 day period, although we hope that doesn’t happen any time soon.
2011-05-20 20:48, By: Alan S., IP: [24.119.230.17]

L5: sepp (72t) newbieMaybe I am mistaken, but I thought that you could take a full additional quarterif you had anynumber of daysbefore the next quarter. Similarly, you could take a semi-annual payment for each 6-month period in which you took adistribution, but if you wanted to do that, you could always take a full year’s amount anyway.
For example, I thought that you could take a 3-month quarterly payment if you started in Oct, Nov, or Dec. Otherwise there would be no reason for the quarterly provision, only monthly prorated amounts.2011-05-20 21:08, By: dlzallestaxes, IP: [96.227.217.194]

L6: sepp (72t) newbieIn the first year, or last year, I have always thought it best to take either a full annual payment or a prorated monthly payment for the number of months left in the year.2011-05-20 21:36, By: Gfw, IP: [24.148.10.164]

L7: sepp (72t) newbieBut, am I correct that if you start in June that you can take 7, 9, or 12 months’ worth, or if starting in Sept, 4, 6, or 12 ?2011-05-21 15:37, By: dlzallestaxes, IP: [96.227.217.194]

L8: sepp (72t) newbieNot really.
If you start in June, you should take either 7 months or theannual amount.
If you start in September, you can take 4 months or the annual amount.
Everything that I know says annual or pro-rata based for the remaining months in the year.2011-05-21 15:52, By: Gfw, IP: [24.148.10.164]

L9: sepp (72t) newbieSince these proposed non approved approaches all match up to the annual amount divided by a number 1-12, and the IRS does not know the starting month without asking for documentation, most of them probably skate through.
Further, since the IRS does not know the full annual calculation until the end of January following the first full year, they would have to wait until they got that number and then look at the prior year distribution to see if it equals x/12 of the full distribution. Of course, the chance of the IRS doing this is slim and nil.
More likely, for this and any other 72tinfractions, the IRS would catch it in a random inquiry or an inquiry for some unrelated reason, so 72t participants should stick to the starting month pro rate factor or take the full annual to avoid becoming avictim of an IRS lottery selection.
2011-05-21 18:17, By: Alan S., IP: [24.119.230.17]

L10: sepp (72t) newbieAlan… totally agree.
I will also add that I think most of the audits of SEPP plans are random or that they are the result of other occurrences/inconsistencies in a regular tax return.2011-05-21 18:42, By: Gfw, IP: [24.148.10.164]

L3: sepp (72t) newbieThank you to all who have responded, this is very helpful and I am learning a lot. After reading the replies, the “72t Planning/Pointers” here and reviewing the “72t worksheet/form” here is what I am thinking:
IRA account value today is $770,000,same account value February 28,2011 was $727,039
Set up 72t SEPP distribution using initial valuation date of February 28,2011 $727,039
use 2.98% interest rate, amortization method arrives at $37,307.09
start monthly distributions first week of June of $3,108.92 each
I have 2 questions:12 x $3,108.92 = $37,307.04 which is 5 cents less than amortization method amount, is that okay or is there a better way to tweak it? Second question is: Does my initial account valuation seem reasonable? I am still a bit unclear in that regard, sounds like use year end or a reasonable period…Thank you all for your help, Bill J2011-05-22 08:15, By: bill j, IP: [24.122.159.146]

L4: sepp (72t) newbieIf the value of your account is $770k, then is $727k a reasonable representation? Maybe not. If you want to use $727k, then move $43k into a second IRA account (for emergencies, etc) before starting the SEPP and value the account after the split.
Also remember that the 5 years starts with the date of the 1st distribution and not the date that you choose to value you account.
You should be OK as long as you are within $.50 of the calculated annual distribution amount.2011-05-22 11:34, By: Gfw, IP: [24.148.10.164]

L5: sepp (72t) newbieGFW’s approach is the one I would recommend also.
1. It gives you the flexibility of having an extra $ 43K set aside in a separate account for emergencies, which is very important.
2. It is more current than 3 months ago.
3. Less chance of IRS challenging the balance you selected, even though $ 727K is only 6% less than $ 770K.
4. See # 1 again.2011-05-22 11:57, By: dlzallestaxes, IP: [96.227.217.194]

L6: sepp (72t) newbieI am confused in determining the initial account balance to use…I would like to use 770k but thought the IRS input was that it should be an earlier/lower/more conservative date…I don’t think I need a second IRA for emergencies as I also have a “cash” taxable account (50/50 invested in municipal bonds/taxable CEF’S)valued in excess of 2.5mm that provides enough for living expenses..I would like to start the SEPP to provide extra cash flow just in case..I have zero debt, I owned 2 houses, just sold my primary home in Sarasota,Fl and am now selling second home in Quebec (no mortgage) and planning on traveling for a few years…I can also borrow if need be on margin upwards of 600k…am i missing something else on the second IRA? thanks for your help..Bill J2011-05-22 12:35, By: bill j, IP: [24.122.159.146]

L7: sepp (72t) newbie15%-25% taxes plus possibly state taxes would be paid on 72T distributions. Do the math! Live off your taxable account. Geo2011-05-22 15:46, By: Geo, IP: [71.238.74.4]

L8: sepp (72t) newbieBill, your most recent additional information makes you a very atypical 72t plan prospect. You do not need an emergency fund, and now the question is whether you need a 72t plan at all. But that’s your call.
If you want to use the Feb statement account balance, go ahead and do so, but don’t use it unless you start your plan no later than August. But when you do start your plan make sure that the account balance is still within a reasonable range of that 727k.
2011-05-22 18:52, By: Alan S., IP: [24.119.230.17]