SEPP Funding Technique

L1: SEPP Funding TechniqueWhen I was setting up the mutual funds inthe IRA from which I would subsequently take my SEPP payments, it occured to me that Imight be able tofund my SEPP without having to sell any mutual fund shares. I did this by keeping about 10% of my IRA in cash (~18 months worth of SEPP payments), directing all interest, dividends, and distributions into the money market fund, and taking my SEPP payments from the money market fund. This has worked very well for the past 2 years. Even though I have taken about $75k from my IRA via SEPP, my account is now about $40k larger than when I retired. So far, at least, I have not had to sell any shares to fund my SEPP payments… knock on wood. If I do have to sell shares, I also have about 20% of my IRA in short term bond funds that can be sold, if necessary. By doing this, it is unlikely that I will need to sell any shares during a market down-turn or if I do it will be cash and then bond fund shares that should not have substantial market losses. The fact that cash has performed as well as or better than most bond funds also helps. While this technique cannot guarantee that no fund shares will need to be sold during my SEPP, it has worked well so far.
Ed_B
2007-03-16 20:28, By: Ed_B, IP: [67.170.159.37]

L2: SEPP Funding TechniqueEd_B:
Sounds like your plan is working OK so far. One thing to consider is to take some profits (sell shares) of equity funds that have had good growth. This will take fewer shares to generate the needed dollars than the shares cost you when you bought them. For some strange reason people think they should only sell loosers for generating income but that is just backwards.
Jim2007-03-17 11:25, By: Jim, IP: [24.252.195.14]

L2: SEPP Funding TechniqueHi, Jim:
I agree that to profit from investing, one should sell shares that have appreciated and not shares that have declined… buy low, sell high! I only mentioned the bond funds as potential sells because their share price does not fluctuate very much. They are only down a few cents a share during the recent 5% market decline. As things now stand, I will not need to sell any shares in 2007 and perhaps not in 2008. There is enough cash in the money market fund now to fund my usual SEPP payments for about 18 months. I do this because the “typical” recession lasts from 9-18 months and averages about 13 months. If I did sell the bond funds, that would generate enough cash to fund my SEPP for the remaining time. My 5 year requirement will be reached in March of 2010 but I”ll be turning 59.5 in February 2009. Since both have to be reached, I will be SEPPing along until at least March 2010.
Regards,
Ed2007-03-17 13:44, By: Ed_B, IP: [67.170.159.37]

L2: SEPP Funding TechniqueHey Ed,
Sounds like a great idea (your SEPP Funding Technique), and I”m thinking of setting mine up very soon and nearly identical to yours. I do have a few questions.
1. Was the process simple or involved, regarding your holding company (Vanguard etc.)
2. Do you have your payments sent directly to your bank, and how often do you receive payments? monthly, quarterly, etc.
3. Are your payments taxed by your holding provider, or are you responsible for paying at years end, or estimated throughout the year?
4. Any additional words of advice would be appreciated.
Thanks, Chuck2007-03-27 09:15, By: Chuck, IP: [69.142.167.128]

L2: SEPP Funding TechniqueHi, Chuck:
Yes, this technique is working real well so far and, hopefully, will continue to do so.
As to your questions:
1. I thought that it was pretty simple to set up. I did choose Vanguard as the custodian and they had the necessary forms for setting up my 401k to IRA rollover account. This was done first, so was empty for a few weeks until the check was received from Fidelity. The difficult part in most rollovers is actually getting the money transferred to the new custodian. There either seems to be a lot of complications in this OR the original custodian can be somewhat reluctant to release the funds. It took me about 3 months to actually get the funds transferred and my entire balance was in cash at the time. They would not release the funds directly to Vanguard, as requested, but ended up sending me a check for the entire amount. This was OK, if somewhat clumsy IMHO, but at least it was made out to Vanguard for the benefit of my IRA so no federal tax was withheld. This is a VERY important point. You do not want to receive a check made out to you. If this happens, the 401k plan administrators will withhold 20% of the amount distributed. When you roll over the remaining 80%, the IRS will consider the 20% as a distribution, even though they have it! This complication is easily avoided, if the custodian simply follows your instructions on how the check is to be made out. That method should be to the IRA custodian, FBO (for benefit of), your name here.
2. Originally, my quarterly payments were mailed to my home address. After 6 months of that, I switched it to a direct deposit to my credit union checking account. I really… no, REALLY, like direct electronic deposit of these funds. It is quick and I have had no problems with it at all.
3. We have a somewhat complicated tax situation due to my wife”s home business. I have elected to have Vanguard withhold 15% of my SEPP distributions for income tax but we also have quarterly estimated payments. Without the business income to complicate this picture, the 15% withholding would probably suffice on its own although the amount might have to be tweaked a bit to get it just right. Note that the amount of tax withheld does not change your annual payment amount. The gross distribution will be the same whether tax is withheld or not, so feel free to have the amount withheld that suits your tax situation. This is usually at least 10% and can be increased from there, most often in whole percent increments.
4. Words of advice? Hmmm… well, just a couple. First, keep every single scrap of paper that is generated during the SEPP process, including copies of your completed SEPP form, your rollover check, your final 401k account balance sheet (usually for 12/31 of the year prior to starting your SEPP, but apparently either of the 2 months prior to starting your SEPP is also acceptable to the IRS, and your calculation for the amount that you want distributed. Note that there are 3 IRS approved calcultions for a SEPP amount, lifetime, amortization, and annuitization. All of these are described in the excellent Vanguard SEPP brochure, which you can download from their web site. I picked the amortization calculation and used their worksheet to get the distribution amount and then checked it against the calculator on this web site. They agreed to within about $0.50, so I was satisfied that the amount calculated was correct. Also keep copies or originals of any emails or letters that deal with this topic as well as the ending annual statements for each year. If, for any reason, the IRS should question the validity of your SEPP, you will want to have full and complete documentation of what was done and when. This should be kept in some form of organization. Mine is in a 3-ring binder with tabbed sections for each topic of interest with the pages arranged chronologically from begining to most recent. One other thing is that most IRA custodians do not correctly code box 7 of form 1099R. They will put a “1” there for SEPP owers when a “2” is actually the correct code. To make up for this error, SEPP owners need to file a form 5329 with their other tax docs. This is a 2-page form comprised of 8 sections. Fortunately, only one of the sections needs to be completed to satisfy the IRS that you have a SEPP and are claiming the 72(t) exception to the 10% early withdrawal tax.
Hope that this helps and good luck with your SEPP. 🙂
Ed2007-03-27 11:40, By: Ed_B, IP: [67.170.159.37]

L2: SEPP Funding TechniqueIn working with custodians (Fidelity, TD Ameritrade) for transfers, I always have them wire the funds. It costs some money, but the transfers happen within days, not weeks or months.2007-03-27 12:30, By: dond, IP: [24.32.37.113]

L2: SEPP Funding TechniqueI would like to comment on Ed”s first point about the time required for transfers from the K-plan to the IRA.
Once the custodian has the transfer paperwork “in good form,” they will immediately process the transfer. The problem arises from the ground rules set up in the Plan Document which is controlled by the decision makers at the company sponsoring the K-plan, ie, the folks you used to work for. Some plans call for distribution immediately and others call for distribution after some delay. Some only distribute quarterly. One practical reason for the delay is to be sure all contributions, company and employee, have been credited to the individuals account before allowing the transfer. Some plans requireextensive paperwork while others only need a phone call by the employee to the custodian and verbal instructions where to send the check. While trustee-to-trustee transfers directly from the K-plan custodian to the IRA custodian is preferred, more and more plan sponsors are requiring the custodian to cut the check to the new custodian, FBO the participant, and mailing the check to the participant to then get it into the IRA custodian.
Jim2007-03-27 12:36, By: Jim, IP: [24.252.195.14]

L2: SEPP Funding TechniqueI echo Jim’s comments with respect to doing a rollover from a 401K plan to an IRA. Even though my 401K plan was held at Fidelity and I was rolling the funds to a Fidelity IRA, it still took 2 months to complete the rollover due to limited windows of when rollovers are processed.Transfers beween IRA custodians are different beasts.2007-03-27 14:01, By: dond, IP: [24.32.37.113]

L2: SEPP Funding TechniqueJim:
I”m not disputing such things as you bring up. That said, however, Fidelity was not what I would call responsive. My decision on this had been made before I called them to arrange the transfer of funds, yet they wanted to discuss it… repeatedly. Depending upon with whom I spoke, I heard a number of things during these calls that were, shall we say, less than truthful? My favorite was “we don”t have a form for that” (in reference to transferring to an IRA custodian). One thing I do know about custodians is that they do not do anything without a form and they have one for everything imaginable… plus some that aren”t imaginable. In any case, checking the Fidelity (and probably others too) web sites will show MANY ways to transfer money TO them but few, if any, for transferring money elsewhere. I have never had this problem with Vanguard or Scottrade. When I ask for my money, they deliver it and promptly… as they should. Interestingly enough, Fidelity told me that if I wanted to transfer my 401k plan money to a Fidelity IRA, well, that could be done immediately. I never expected same day service from my 401k plan but within the same month would have been reasonable.
Ed
2007-03-27 15:06, By: Ed_B, IP: [67.170.159.37]