SEPP or RMD?
L1: SEPP or RMD?
I’ve been withdrawing funds from a 401(k) account on a monthly SEPP basis since 2007. I want to make a one-time switch to the Required Minimum Distribution method next year.
Since “Required Minimum Distribution” typically means a minimum amount that must be withdrawn, how does that work with the SEPP requirement? In other words, if my computed RMD is $1000 per month, can I take out more than $1000? Do I have to take out exactly
$1000 each month? If I don’t take out exactly $1000 does that violate the SEPP requirement?
Also, can I elect to take more than the computed RMD in a certain year as long as I take the same amount each month?
2011-11-07 23:57, By: Bob33, IP: [22.214.171.124]
L2: SEPP or RMD?
>>if my computed RMD is $1000 per month, can I take out more than $1000
No. Or, yes if you take exactly 12,000 for the year.
>>Do I have to take out exactly $1000 each month?
Yes.Or, no if you take exactly 12,000 for the year.
>>If I don’t take out exactly $1000 does that violate the SEPP requirement?
Yes. Or, no if you take exactly 12,000 for the year.
>>can I elect to take more than the computed RMD in a certain year as long as I take the same amount each month?
No. It isn’t the monthly amount that is important, only the annual amount.
Also remember that if you make the switch, the Minimum Distribution method will require a recalculation in each remaing year of your SEPP.
2011-11-08 00:14, By: Gfw, IP: [126.96.36.199]
L3: SEPP or RMD?
Typical of IRS, it is confusing. There are 2 completely different REQUIRED MINIMUM DISTRIBUTIONS in the tax code.
On this website, we discuss a SEPP METHOD which is called Required Minimum Distribution. It is a calculation that is an annual amount that is lower than traditional method. Regardless, under SEPP 72-T plans, you calculate an annual distribution amount by
a method, and you can take that amount, and only that amount, each year, regardless of the frequency during any year.
Everywhere else in the tax universe, “RMD” (REQUIRED MINIMUM DISTRIBUTION) refers to IRA (and other) retirement plan distributions once you reach 70 1/2. In all of those situations you have complete flexibility to take any amount from that RMD “MINIMUM”
to taking the entire account balance out.
Don’t be confused by the 2 “RMD” designations, nor “SEPP” vs “SEP” (Simplified Employee Pension).
2011-11-08 01:06, By: dlzallestaxes, IP: [188.8.131.52]
L4: SEPP or RMD?
Thanks for the clarifications. That second reply is perfect: “RMD” in a 72t world means both “Required Minimum” and “Required Maximum”. That’s the missing piece.
Related question 1: if I’m withdrawing $5,000 per month now, and the RMD calculation indicates I can take $10,000 per year next year, that means I could not make the switch after February, correct?
Related question 2: how can I estimate what my January 1 withdrawal will be, since it’s based on the 12/31 balance and there’s a processing period to notify the financial institution about the new payment amount?
Related question 3: since I’m currently on a monthly SEPP, I’m assuming I no longer need to have equal monthly payments since the RMD is an annual method, right? Will taking out different amounts each month trigger the IRS to question me?
2011-11-08 22:55, By: bob33, IP: [184.108.40.206]
L5: SEPP or RMD?
Yes Don’t worry about making a January withdrawal or merely use some balance close to 12/31 to make the estimate and do the final calculation based on the 12/31 balance when known. All you have to worry about is taking the calculated annual amount (no more
and no less) by 12/31 of the calculation year. Take out any amount at any frequency as long as you take the calculated annual amount.
See answer #2.
2011-11-08 23:24, By: Gfw, IP: [220.127.116.11]
L6: SEPP or RMD?
More confusion. I took my first distribution in April 2007. Can I convert to RMD on 1/1/12, or do I need to wait until April 2012? If I wait until April, I will have already withdrawal well in excess of the computed annual RMD amount.
“(d) Account balance. The account balance that is used to determine payments must be determined in a reasonable manner based on the facts and circumstances. For example, for an IRA with daily valuations that made its first distribution on July 15, 2003,
it would be reasonable to determine the yearly account balance when using the required minimum distribution method based on the value of the IRA from December 31, 2002 to July 15, 2003.”
2011-11-08 23:27, By: bob33, IP: [18.104.22.168]
L7: SEPP or RMD?
SEPP plans operate on a calendar year basis – so making the change in January will create no problems.
The account balance paragraph is really only relative to determining the initial account balance – what you would have used in April 2007 for the initial calculations.
Suggest that you also use our First Modification Date calculator and determine when the plan will end. The calculator can be found athttp://72t.net/72t/Calculator/First/Modification/Date
2011-11-08 23:49, By: Gfw, IP: [22.214.171.124]
L7: SEPP or RMD?
The month you started in 2007 is immaterial with respect to the one time RMD switch. The quoted statement is just one example.
We generally recommend that you run the RMD method exclusively on a calendar year basis. That means using the 12/31 account balance and in the following calendar year withdrawing the exact calculated amount distributed as you see fit.
One such distribution pattern that would work well with respect to the plan are quarterly distributions in mid Feb, mid May, mid August and mid November. These dates allow time on both ends of the year to do calculations or make up for any distribution errors.
No distribution needed in January or December, but if you discover an error after 11/15, you have another month to try to correct it. If you are short, you can make one final distribution and if you are over, you can roll the excess back to the IRA within
60 days of your last distribution.
Using other dates will not necessarily bust your plan, but they increase the chances that the IRS will not understand what is going on. Finally, the last two months of the year generally are better for investment markets than the summer and early fall time
I also suggest that you use your own life expectancy for the RMD calc rather than joint with your beneficiary. You will get a higher distribution and avoid problems associated with a more complex joint calculation.
2011-11-08 23:56, By: Alan S., IP: [126.96.36.199]
L8: SEPP or RMD?
What forms and/or process do I need to go through to make the change to RMD on 1/1/12? Does the IRS need to be notified?
2011-11-10 19:21, By: bob33, IP: [188.8.131.52]
L9: SEPP or RMD?
No forms or official notification required for the IRS. Just keep good documentation in case of an audit. Recalculate the annual distribution in each new year and in early december, make sure that you have taken the right amount. Good luck!
2011-11-10 19:30, By: Gfw, IP: [184.108.40.206]