L1: SEPP 72T
Birthday 12/19/1955, I had SEPP 72T funded in March 2011 and I have taken 2 quarterly withdrawls June 2011 and Sept 2011. I just noticed that my financial advisor didn’t move all the funds needed into the SEPP account to follow the early withdrawl rules.
The funds were available but just got missed in the transfer. Now I have drawn out to much for the amount funded and I know that these can’t be added now. What is my next step to correct this as it is still early in the stages of this plan.
2011-09-15 13:43, By: Help, IP: [22.214.171.124]
L2: SEPP 72T
Where were the other funds that didn’t get moved? Were they in an IRA account, pension, 401(k), etc?
What was the balance used in for the initial calculations? Were the missing assets used in the initial calculations? When were the missing assets merged together.
Based on a first distribution of 06/??/11, the interest rate used should have been 2.98% or lower and your age would have been 56 – is that about right.
Perhaps a few more details would help to get a moremeaningful answer.
2011-09-15 17:40, By: Gfw, IP: [126.96.36.199]
L3: SEPP 72T
You may not have any problem. If you are saying that you have taken too much in June and Sept on a quarterly basis, based upon a lower account balance, then you can reduce the December payment accordingly.
Even though you “set up” your plan in March, it really didnot start until your first distribution in June. Therefore, you have 2 options for 2011 :
1. 7/12 of your corrected annual payment.
2. 100% of your annual payment, even though you thought that you were going to take only 2 or 3 quarterly payments.
I would not try to consider the missed amounts, and would reduce my plan account balance to the corrected figure in case IRS ever questions your documentation ( which I would revise in accordance with the actual situation).
2011-09-15 18:11, By: dlzallestaxes, IP: [188.8.131.52]
L3: SEPP 72T
The SEPP was set up for 9 years to withdraw $10000 a year, I had $ 244,000 at the time in my traditional IRA which he moved $90000 into a new account for the SEPP, which I believe should have been around $191,101. I wasn’t aware of the calculations at the
time and from what happened he wasn’t either. Now I have received distributions of $2500 on June 10 and $2500 on Sept. 10. I am now aware of the calculation and need to get this corrected if it can be before the next distribution on Dec 10.
2011-09-15 19:51, By: help, IP: [184.108.40.206]
L4: SEPP 72T
Your latest response makes absolutely no sense.
1. Are you saying that 9 years ago you didn’t notice that your SEPP IRA had only $ 90k and not $ 191k, and that your original IRA had $ 154k when it should have had $ 53k after the SEPP was set up ?
2. If you have been taking $ 10k per year based upon a balance of $ 191k for your plan when it had only $ 90k, the plan has been busted since it started. Therefore, you will owe 10% penalty, or $ 1,000 for every year, or $ 9,000, plus interest.
3. If so, try to get the broker/advisor to admit his mistake in writing. Then after you get that admission, get him, or his firm, to agree to reimburse you the $ 9,000, plus interest.
4. There is nothing that you can do now to correct the situation for 2011.
5. Immediately discontinue the original SEPP plan, and start a new SEPP with whatever amount that you want.
6. Although we would not recommend it, you could wait to see if IRS ever audits you before voluntarily notifying them, and paying them.
7. It would not pay to try for a PLR (Private Letter Ruling) which costs $ 10,000 to IRS, plus $ 7,500 to $ 10,000 to a professional to handle it, to ask them to allow you to transfer the additional amount originally missed, and to waive the 10% penalty.
2011-09-15 20:16, By: dlzallestaxes, IP: [220.127.116.11]
L5: SEPP 72T
This is a SEPP and was set up in March 2011 with the first withdrawl in June, it was set up to pay for a Life Insurance policy.
2011-09-15 21:26, By: help, IP: [18.104.22.168]
L6: SEPP 72T
>>This is a SEPP
Sorry, but I don’t think you know that is a SEPP – it doesn’t meet the requirements as outlined in Rev.Rul. 2002-62. You may call it a SEPP, but the IRS may have a totally different idea.
A SEPP plan is effective on the date of the 1st distribution, not when you “set it up”. The calculated distribution must be based on life expectancy – not 9 years.
Are you really looking for help? It sounds like you made up your mindbefore you arrived. You also haven’t answered any of my questions.
2011-09-15 21:39, By: Gfw, IP: [22.214.171.124]
L7: SEPP 72T
I just asking for some answers, what I am trying to say is the financial advisor didn’t do any calculation. He just moved $90000 into a new IRA account and set up a schedule of payments $10000 a year like I was older than 59.5 and didn’t need to do the
early withdrawal calculation. I was new to this and didn’t know about the calculation until I was reading about it lately. He messed up and I am trying to see if it can be fixed.
2011-09-15 22:04, By: help, IP: [126.96.36.199]
L8: SEPP 72T
Let’s start with… you can’t correct something that doesn’t exist and from your posts, you don’t have a SEPP plan so it can’t be corrected. If it is an immediate annuity, it would also not be exempt from the 10% penalty.
If the answers to my questions are what I believe them to be, I would start by gathering up any documents that you were given by the insurance agent and then getting my attorney involved
Next I would have the attorney contact the agent requesting reimbursement for the 10% penalty and the legal fees. I would then have the attorney contact the insurance company requesting a termination of the contract with no surrender charges and transfer
the funds (less the amounts that you already received) back to your IRA account. What you already received will be subject to the 10% penalty, but that is covered above.
And finally, if I still wanted a SEPP plan – which I don’t believe you will – I would ask questions before and not after – it always works better that way.
2011-09-15 22:55, By: Gfw, IP: [188.8.131.52]
L5: SEPP 72T
I’ll try to answer your question the best I can. I wil be 56 in Dec of this year.
1. No, In March of this year I needed $10000 yearly from my account. So my advisor set up a new IRA account an moved $90000 into it from my $244000 account. He set a distrubution withdrawal of $10000 a yearly payed quarterly so I receievd $2500 on June
10, 2011 and $2500 on Sept 10, 2011. I am only 55 so he needed to do the calculation and never did so this account was never funded correctly.
What I am asking is there a way to cancel the account and pay any penalties and start over the correct way.
2011-09-15 23:00, By: Help, IP: [184.108.40.206]
L6: SEPP 72T
Yes. Merely pay the penalties on your 1040, learn what a SEPP is and then start over. I would also start over with a new “financial advisor” that knew what a SEPP is and not the “financial advisor” that you currently have.
For purposes of a SEPP in 2011, you are 56 (as of 12/31), not 55 – age is your age on 12/31.
2011-09-15 23:10, By: Gfw, IP: [220.127.116.11]
L7: SEPP 72T
I now know what a SEPP is but back then I didn’t know alot about it. Would the penalties be on all $5000 ( $500 ) .
2011-09-15 23:23, By: Help, IP: [18.104.22.168]
L8: SEPP 72T
Assuming there are no after tax contributions, yes… 10% of $5,000 = $500.
2011-09-15 23:30, By: Gfw, IP: [22.214.171.124]
L4: SEPP 72T
Let me guess. Your “financial advisor” sold you a 9 year immediate annuity and called it a SEPP.
Am I on the right track?If yes, and the other information your prevous posts is correct, you really never had a SEPP. Even if you set the distribution amount at $5,000/year, you needed$95,550.55 to fund the $5,000.
2011-09-15 20:24, By: Gfw, IP: [126.96.36.199]
L5: SEPP 72T
I think he is confused by similar nomenclature.
I think his financial advisor established a SEP-IRA, not a SEPP. He funded part of it with an annuity.
He is concerned about something that doesn’t exist asa problem. I doubt if any financial advisor would have set up a SEPP for someone over 59 1/2 who did not even need one.
2011-09-15 22:24, By: dlzallestaxes, IP: [188.8.131.52]
L6: SEPP 72T
Dlz… read the original post – based on his date of birth, he is 56.
2011-09-15 22:52, By: Gfw, IP: [184.108.40.206]
L7: SEPP 72T
I think there are still a few missing links here, but it almost looks like the advisor may have embarked on a plan to tap the IRA to fund the life insurance purchase over a period of years longer than the SEPP would run (9 years
vrs 5). To do that the funds may have been transferred to an annuity IRA to purchase a 9 year period certain annuity.
The fact that the annuity would pay out beyond the modification date of the SEPP is not a problem, but we still have no idea if the SEPP was calculated and executed correctly in the first place, ie actual starting balance, correct
interest rate and age. Of course, the SEPP could not have started before the month of the first distribution and the interest rate could not exceed the max for either of the two months prior to that month.
If this is even close to correct, the advisor gets a commission for the life policy and another commission for the annuity……wow.
2011-09-15 23:29, By: Alan S., IP: [220.127.116.11]
L8: SEPP 72T
Alan S. Your guesses are right on. However, he already said above that there were no calculations done – they just moved $90,000 (probably the amount of the annuity) to pay out $10k per year.
Having come from the insurance industry, this is an old sales pitch that if the numbers are done properly, seldom works to the client’s benefit, but the concept looks awfully good on paper. My guess is that the insurance policy was illustrated as a vanishing
premium payable for 9 years based on the insurance company’s current assumptions.
2011-09-15 23:43, By: Gfw, IP: [18.104.22.168]
L9: SEPP 72T
I’m sorry for my misunderstanding, or memory. It’s hard to remember all of the facts and details when only the last posting is visible for a responder.
You should do the calculations on this website based upon the $ 90,000 for age 56, with the interest rate for April or May. That will determine the “annual distribution”.
Based upon $ 90,000 in this SEPP IRA, which is apparently invested in an annuity which pays $ 10,000 per year, at $ 2,500 quarterly, you probably have not exceeded the annual distribution amount yet with the 2 quarterly distributions you have received so
far. Therefore, you probably have not busted the plan, yet. So you can take the balance of the annual distribution before 12/31 ( preferably by 12/15). BUT, you may have a problem in all future years getting $ 10,000 per year to pay the premiums on the life
You can set up a 2nd SEPP IRA with the other $ 100,000 which was “inadvertently” not used to fund this SEPP IRA. You could use the distributions from both SEPP IRAs to pay the life insurance premiums. If you do not need all of the $ 100,000 to generate the
shortage for the life insurance premiums, then use the “reverse calculator” on this website to determine the amount that you could use, and leave the balance in the other IRA with the other $ 54,000 that you did not plan to use initially.
2011-09-16 00:19, By: dlzallestaxes, IP: [22.214.171.124]
L10: SEPP 72T
Did the calculation and using $90000 with age 56 and April rate of 2.98% and it came out to $4710 annual so it looks like I already busted the plan. I guess I’ll just have to get my advisor to pay up for the penalty. Wish me good luck.
Thanks for all your help.
2011-09-16 00:54, By: Help, IP: [126.96.36.199]
L11: SEPP 72T
Did you try the May interest rate ?
Someone may know of a method that could increase your distributions by $ 300. Otherwise, I would suggest “cutting your losses”, and terminating you first SEPP. Then in Oct. start a new one, or 2, with the correct amounts. This will only cost you the $ 500
penalty which I’m sure that the financial advisor will gladly pay.
2011-09-16 01:02, By: dlzallestaxes, IP: [188.8.131.52]
L12: SEPP 72T
Here’s my two-cents worth as to what’s going on.
Agent wants to sell a “cash-value life insurance policy” (probably a UL) with premiums of $10k annual premiums paid $2,500 quarterly for 9 years. Agent did “calculate SEPP” of $10k X 9 years = $90,000. (Typical erroneous calculation.) (I doubt the $90k
funded a SPIA since it would have taken less than $90k to fund a 9-year payout to equal $90k.)
Agent does not understand how 72(t) works but was only concerned with finding a way to fund the 10-years of $10k per year premiuims to a CV Life Insurance policy.
If you need life insurance go find a new agent who will have your best interest at heart instead of commissions which I suggest is your current agent’s focus. Like DLZ stated, get the current company to cancel and refund the $5k premiums paid on the current
policy. You may need to file a complaint with your state insurance commissioner. Get an attorney.
If you need funds for living expenses, find a qualified advisor who REALLY DOES understand 72(t) to help you set it up. In fact by now you probably know enough to set up a successful plan.
As for the two distributions you have already taken, consider them “early” and pay the penalty. Then go after the agent / agency for a refund.
2011-09-26 18:55, By: Jim F, IP: [184.108.40.206]