L1: SEPP calculation..First I would like to thank those responsible for this site. It has been a tremendous help in setting up my 72t plan.
Today I went in to initiate my 72t. I was armed with everything I thought I would need. (the mid term interest rate, my account balance, my age, etc.) I used the SEPP calculator on this site (along with several others) to determine what the monthly distribution would be. The annual amount was calculated and then divided by 12 to determine the monthly amount. All of the calculators were within pennies of each other including the one used by my plan custodian (LPL Financial). Here is the question I have. The calculator used by LPL Financial asks if the payments are to be made annually or monthly. If I answer monthly, the number that is calculated is approximately $28 greater per month than if I answer annually. They explained that this is because the calculator factors the interest rate in on a monthly basis. Is this something that I should be concerned about? I have not found any other calculator that factors this into the calculation.2011-05-09 18:17, By: Tom, IP: [220.127.116.11]
L2: SEPP calculation..Tom,
It does not need to be factored in. This site uses just the annual 120 mid term rate, and this is fine with the IRS. Before going into detail, please re check which option is $28 MORE per month? It should be the annual, not the monthly……2011-05-09 19:55, By: Alan S., IP: [18.104.22.168]
L3: SEPP calculation..Alan, to answer your question, it is $28 more per month.2011-05-09 20:07, By: Tom, IP: [22.214.171.124]
L2: SEPP calculation..The only concern is that LPL appears to be adjusting the interest rate to accommodate the differencein annual paymentsand monthly payments.
Ask the LPL representative if next year you decide to take a 1/3 payment in February, a 2/3 payment on August 18th if they would be willing to recalculate the interestrate on thatpayment schedule. Then ask about a payment of 1/8th on February 3rd and 7/8ths on November 5th.
It’s nice to convert the annual to monthly, but all that really matters is the annual payment.2011-05-09 19:56, By: Gfw, IP: [126.96.36.199]
L3: SEPP calculation..Gfw, thanks for the reply, but I am not quite sure what you are asking…
I just want this to be right. The LPL advisor told me that their calculations are correct. It just bothers me that I cannot find any other calculator that comes up with the same result per month. Just to be clear, if I ask for an annual distribution and then divide by 12, all calculators agree.2011-05-09 20:14, By: Tom, IP: [188.8.131.52]
L4: SEPP calculation..They are merely making things EXTRA complicated by ajusting the intest rate to reflect the initial planned distribution. There are several PLRs using the annual divide by 12 method.
The point I was making is that if they adjust the initial interest rate for a monthly payment, will they readjust the rate later if you decide to switch from monthly to another frequency? 2011-05-09 20:24, By: gfw, IP: [184.108.40.206]
L5: SEPP calculation..gfw and I are saying the same thing, ie the only rate that matters is the annual interest rate, for which the max is 2.98 for May SEPP inception dates.
But am still curious about how LPL arrived at this difference. The monthly interest rate is 2.94, .04 lower than the annual rate, so even if LPL was right, I don’t see how the monthly payout is HIGHER when the interest rate is lower.
gfw – Aren’t the annual rates in the site calculatorsbased ona year end distribution? The higher annual rates (see earlier link) appear to indicate that, and the lower monthly rate would seem to back that up. We agree that what LPL is doing is unwarranted, but am trying to determine if it could actually bust a plan. Certainly, if they intended to vary the rate depending on distribution pattern from year to year, they are inviting a mess with the IRS.2011-05-09 22:26, By: Alan S., IP: [220.127.116.11]
L6: SEPP calculation..Tom:
The only number that the IRS really cares about is the annual amount distributed. You can take it all at once or slice it into 2, 3, 4, 6, or 12 pieces and all that matters is whether or not they all add up to the same calculated distribution amount. If they do, then no problem!
You can also change your distribution frequency at any time if you want. Quite a few SEPP owners start with quarterly distributions and then switch to monthly distributions some time later on. None of this matters because the IRS does not know (or care) how often your money is distributed throughout the year.
I agree with Alan that if there is an adjustment in amount for distribution frequency, it should favor the longer time periods between distributions because more of your money is left in the account to grow and compound before the next distribution is made. Personally, I would not want to get into any adjustments of a SEPP calculation and would much prefer to do the applicable annual distribution calculation, divide that number by 12, and call it good. As with MANY things in life, simpler is usually better. The simpler your plan is, the fewer things there are to go wrong and the less likely they are to cause problems.
Ed2011-05-09 23:58, By: Ed_B, IP: [18.104.22.168]
L7: SEPP calculation..Thanks to everyone for providing feedback. I’m still confused as to why the numbers don’t match up. Does anyone know where I can find the actual IRS approved formula(s) that are used to make these calculations?2011-05-10 03:30, By: Tom, IP: [22.214.171.124]
L7: SEPP calculation..Tom,
I don’t know as much as Alan and GFW, but I do know that if you insisted that LPL usethe (lower) annual figure that you had computed, and then divided by 12 for your monthly payment, and if that is $28 per month less than what they want to pay you using their monthly calculator, the bottom line is that even if you were wrong in your assumption and they were right, your SEPP plan would still be valid, because you can choose an interest rate that is less than the max allowed for your SEPP calculation, and in their scenario that you had to use their monthly calculator rate if being paid monthly, I would have to assume a payment that is $28 less per month would be reached in their calculations by using a slightly lower interest rate than what they used in the formula. Then you have covered yourself. Does anyone see an error in that logic?
You don’t want to answer a challenge by the IRS to your SEPP payment amount with a response that “LPL figured out my payment for me”, if their suggested payment that is $28 higher per month turns out to be too high (per year).
With all of this in mind, once you settle on an annual payment amount total to use, I would recommend avoiding annual recalculation, which is an option that some will do on AMORT and ANNUIT plans.
By the way, I used LPL for the last 3 years of my SEPP, after transferring my IRA to them from an earlier custodian. In that case, I gave them the monthly gross amount I was taking (thru my local broker who uses LPL as the custodian) and the payments started. They were never involved in my calculations.
KEN2011-05-10 03:42, By: Ken, IP: [126.96.36.199]
L6: SEPP calculation..We use the annual rate and make no adjustments which is the same way the IRS did their examples.The formula assumes an end of year distribution so in reality, there should probably not be a $28 higher difference. Not really sure what LPL is doing.2011-05-10 04:15, By: Gfw, IP: [188.8.131.52]
L7: SEPP calculation..Tom:
Ask LPL if they will issue “Code 02” on the IRS Form 1099-R (which they will issue next year reporting your annual distribution) if you use their calculations. If they will then this may be their justification for issuing “Code 02” instead of “Code 01” as most other custodians have begun doing over the last few years.
If LPL refuses to “divide by 12” for your monthly distributions, then start by taking a full annual distibution the first year (2011), then process a “60-day rollover” back into the accountfor 4/12ths of the annual amount which will produce the correct prorated distribution for this year. Of course you could just keep theextra amount for an emergency fund for this year. If you do the “60-day rollover” then you will be restricted from doing a second one until 12-months have elapsed.
Then for the second year, to set up a monthly distribution, divide by 12 your calculated annual distribution amount and process a new distribution request form with LPL and specify the dollar amount to be distributed each month and have it sent via EFT directly to your checking account.
Back to the IRS Form 1099-R coding issue: If you do an annual distribution to start with using LPL’s calculations (which sould agree with the calculation from this site) and they agree to issue a “Code 02” but will only issue a “Code 01” if you change to monthly butDO NOT use their calculated amount, don’t worry about it. Take the “Code 01” and file IRS Form 5329 when you do your taxes, just like the rest of the SEPP Plan participants do.
This is a “back-door way” to accomplish what you want but it should work.
Jim2011-05-10 14:36, By: Jim, IP: [184.108.40.206]
L8: SEPP calculation..for anyone that is interested, here is a link to an example of a calculator that asks if you are taking payments other than annualy.. you will see that it produces different results based on the payment frequency.2011-05-10 19:22, By: Tom, IP: [220.127.116.11]
L9: SEPP calculation..w w w. f r a n k l i n t e m p l e t o n. c o m / r e t a i l / p a g e s / g e n e r i c _ c o n t e n t / e d u c a t i o n / t o o l s _ c a l c / t o o l s _ c a l c _ m a i n . j s f2011-05-10 19:28, By: Tom, IP: [18.104.22.168]
L9: SEPP calculation..I think that links are no longer permitted on this website, which may be why it was not in your posting. But you could post it not as a link for us to re-enter in our browser.2011-05-10 19:31, By: dlzallestaxes, IP: [22.214.171.124]
L10: SEPP calculation..OK, I went into the Franklin calculator and yes, they are another one that produces a different payout based on the payment frequency, similar to LPL and Fidelity.
I entered a test case and as I suspected, the total annual payout is smaller for the monthly option than quarterly and quarterly is less than the annual option. Tom indicated that the monthly option paid out MORE and that is incorrect unless LPL is different than Franklin. These custodians appear to be trying to lock the taxpayer into a fixed distribution pattern that matches the payout indicated. The only agreement with this site would be the annual option, which I will test next.
Again, their approach is different than this site, and that is the fault of the IRS for failing to clarify the affects of the payout pattern. But common sense would indicate that the IRS does not appear to be busting any plans for deviating to the extent of the federal rate differences based on payout patterns, or these other sites would have changed their calculators. I also noted that Franklin’s site shows a 120 mid term rate of 2.49. That could be either a very old rate that was not updated or a transposed rate of 2.94 – who knows.
Obviously, while the difference may not bust a plan, I would advise avoiding those particular calculators that inquire about payout frequency.
2011-05-10 21:03, By: Alan S., IP: [126.96.36.199]
L11: SEPP calculation..As a follow up, I wanted to pass along this information. LPL assured me that their calculations are in compliance with IRS regulations. They showed me this from the IRS website in the section: “Retirement Plans FAQs regarding Substantially Equal Periodic Payments” to back up that claim
Can I take my substantially equal payments on a monthly basis?
The simple answer is yes. Your monthly payment under the required minimum distribution method would be the calculated annual amount divided by 12. Under the amortization and annuity methods, the choice of a having the payment made monthly should be part of the original calculation.2011-05-12 02:21, By: Tom, IP: [188.8.131.52]
L12: SEPP calculation..Tom,
Everyone is in agreement that the SEPP distributions can be taken in any combination whatsoever, including a lump sum in January, a lump sum in December, monthly, quarterly, or random amounts at any time you wish to take them.
The point of issue is that LPL, Fidelity, Templeton, and probably a few others feel that the annual amount is determined differently based on WHEN you take your distributions. This is unnecessary, since all these plans are basically calendar year plans. The logic behind these companies is that the IRS publishes 4 different interest rates that are all 120 mid term rates (annual, semi annual, quarterly and monthly). The interest rate is slightly lower as you move toward monthly, and the current max annual rate of 2.98 drops to 2.94 under the monthly column. That is why their annual calculation is lower when the lower monthly rate is applied rather than the 2.98 rate.
But there is noneed to use a rate lower than 2.98 regardless of your distribution pattern. Think about this – what if you startedwith a monthly distribution using 2.94 and then switched to something else the following year.Does that mean that your interest rate changesto 2.98 and your annual total goes up? No, it must stay the same as the IRS WILL bust your planif your 1099R distribution total changes from year to year.
What if you want tomaximize yourannual totalso you tell them to use the annual rate? Then the next year you change to quarterly or monthly. Ask them if they are going to change your annual total? If they say yes, then you should avoid that firm like the plague because they are going to cause unnecessary confusion. In the end, your plan is between you and the IRS, and LPL cannot help you.
Ask LPL if they are going to code your 1099R with Code 2, which shows that your plan is valid according to their interpretation. If they will do that, perhaps the slightly lowered annual distribution is worth it, otherwise it is not.
Putting this entire situation in perspective, the IRS has not clearly issued instructions about WHICH 120 mid term rate to use and this is why firms make different interpretations (ie guesses) on what the IRS prefers. There is no evidence that the IRS will bust a plan as long as you do not use a rate higher than 2.98 as long as you do not change the annual total from year to year.
Gfw has managed this site for many years, and it gets the highest recommendation from noted IRA experts in the nation. It is the best known such site and specializes ONLY in 72t plan issues. Beyond those facts, the choice is yours.
The position of this site and major posters here is that you can use the max rate for either of the two prior months no matter WHAT distribution pattern you elect. This is also simpler and much easier to understand vrs the added complexity LPL and others are are espousing.
2011-05-12 02:50, By: Alan S., IP: [184.108.40.206]
L13: SEPP calculation..Thanks to everyone for their time and input. I wholeheartedly agree that this site provides a wealth of valuable information for anyone looking to set up a 72t plan. I’m really not sure why LPL, fidelity, etc. insist on making things more complicated then they need to be. Alan, I completely understand what you are saying and I fully agree with you. My plan custodian is LPL and I signed the papers to get this thing going last Monday. So now I guess its full steam ahead!
Thanks again..!2011-05-12 03:10, By: Tom, IP: [220.127.116.11]
L13: SEPP calculation..
From IRS Retirement Plans FAQs regarding Substantially Equal Periodic Payments:
Under the amortization and annuity methods, the choice of a having the payment made monthly should be part of the original calculation.Û
If you factor the life expectancy based upon multiple distributions throughout the year, the distribution amount will be greater than a single annual payout computation.2011-05-12 15:05, By: Jim, IP: [18.104.22.168]
L14: SEPP calculation..Here is the complete paragraph:
Can I take my substantially equal payments on a monthly basis?
The simple answer is yes. Your monthly payment under the required minimum distribution method would be the calculated annual amount divided by 12. Under the amortization and annuity methods, the choice of a having the payment made monthly should be part of the original calculation.
Wow, have not seen this one before. I don’t know how you make it part of the calculation unless you use the lower monthly 120 mid term interest rate. That would lower the total annual distribution, not raise it. This could be either a game changer or could mean nothing. If the “simple answer” means that the lower interest rate must be used, why don’t they just say so? Offhand, I can think of several implications from this statement.2011-05-12 22:25, By: Alan S., IP: [22.214.171.124]
L15: SEPP calculation..Unless someone wants to possibly waste time and money WITH PROFESSIONAL REPRESENTATIVES trying to get IRS to understand what they are doing, I would use the annual IRS interest rate and calculate the annual amount. Then, no matter what frequency of regular or irregular payments you take, just make sure that the annual distributions always equal the annual amount.
In some rare situation someone might have to extremely fine tune their figures to reach a certain hypothetical annual distribution amount, possibly ven using the “reverse calculator”. My suggestion to them would be to forget all of the gyrations and “KISS” (KEEP IT SIMPLE STUPID).2011-05-12 22:46, By: dlzallestaxes, IP: [126.96.36.199]
L15: SEPP calculation.I’m at a loss how to adjust/forecast a future change to the interest rate. However, the life expectancy could be adjusted throughout the year depending on the number of payments. Themortality table is a calculation based upon age, and would adjust the payments upward as one ages.2011-05-13 00:13, By: Jim, IP: [188.8.131.52]
L16: SEPP calculation.I suggest that you read the basics of SEPP 72-T plans in order to better understand how they work.
1. The initial IRA ACCOUNTS that you use for your first calculation are the only ACCOUNTS that you can ever use for your calculation.
2. The “applicable initial interest” rate is the only rate that you will ever use.
3. Your age that you will be at the end of the first calendar year in which you take a distribution is the only age used in the calculation.
4. You use the factors in 1, 2, & 3 to calculate your ANNUAL DISTRIBUTION. This will always be the exact amount that you must take every calendar year, except for the afct that you are allowed to take a prorated amount in the first and last calendar year in which you are at least 59 1/2 years of age, and have taken at least the equivalent of 60 months of payments.
5. You are permitted to make a ONE TIME CHANGE of methods over the life of your SEPP 72-T plan, and then, and only then, can you use a different interest rate, the remaining balance, and age in that year. One of these alternative methods uses the 12/31 balance at the end of each year as the basis for the folowing year’s annual distribution for each new year. ( I always forget which alternative method uses which calculation.)
6. So, do not worry about predicting what will happen to interest rates in the future, and /or tax rates. Do what you need to do based upon the current situation. If you use the “reverse calculator” on this site, and it calculates an ACCOUNT BALANCE that is less than you current ( or previous) balance, then you can set aside the difference in a separate IRA ACCOUNT to give you flexibility in the future if you need some emergency funds ( subject to the 10% penalty, but not busting the plan), or want to set up a 2nd (or more) SEPP 72-T plan to supplement your first one.
2011-05-13 00:37, By: dlzallestaxes, IP: [184.108.40.206]
L17: SEPP calculation.Your repeated use of the word onlyÛ is disturbing the children.2011-05-13 02:25, By: Jim, IP: [220.127.116.11]
L18: SEPP calculation.I think we are getting away from the original problem. It is an interest rate question. Take a look at the following:
Note that the highest so called “applicable 120 mid term rate” is 2.98 under the annual column and 2.94 under the monthly column. The wording on the IRS site that the payment pattern must be considered appears to suggest that if monthly distributions are to be taken, the applicable rate is 2.94, not 2.98. That is what these other calculators are pushing and what Tom was concerned about.
But to my knowledge the IRS does not question the use of the 2.98 rate regardless of the distribution pattern. Thus the gap between what the IRS suggests and what they do. We also know that the pattern can be changed from year to year and the IRS has never suggested that the rate should be changed with the pattern. The IRS expects the exact annual distribution to be the same. That leaves us guessing as to their intent and explains why some IRA custodians (Fidelity, LPL, Franklin) ask about the distribution frequency before their calculators generate the annual figure.
2011-05-13 03:32, By: Alan S., IP: [18.104.22.168]
L19: SEPP calculation.I was responding to Jim’s response 3 hours ago.2011-05-13 03:36, By: dlzallestaxes, IP: [22.214.171.124]
L20: SEPP calculation.I am the “old Jim” who has been posting here since the mid 90’s and my IP Address is 126.96.36.199. Since we now have two new “Jim’s” posting, IP Addresses 188.8.131.52 and 184.108.40.206, I will have to add a distinguishing mark to my handle by adding the first initial of my last name.
Therefore, henceforth I shall sign as “Jim F” instead of just “Jim.”
Have a nice Friday the 13th.
Jim F2011-05-13 13:45, By: Jim F, IP: [220.127.116.11]