SEPP question and income type

L1: SEPP question and SS effectI retired in 2004 at age 54 1/2 (severance, not my choice). We lived
on the severance money until mid 2006, and then began a SEPP. I rolled
my 401K into IRA #1 and my lump sum distribution into IRA #2. My SEPP
began in May 2006 on IRA #1. Since I began in mid year and I didn”t
need the funds, I did not take payments for the months prior to
beginning the SEPP. Was this a mistake since the total annual payment for
calendar year 2006 from the IRA will be less than future years in the
SEPP? Does the SEPP follow a calendar year, or the 12 month period when
I began?
SS Questions. First, don”t I recall that SEPP payments are unearned
income and no Social Security deduction is required? I hope so because I
didn”t deduct any for SS, only Federal and State taxes. Second, how
does this low or $0 earned income affect my SS payments at age 62? I
noticed that my earnings on the annual statement was equal to the 2nd
half of the severance paid to me in early 2006.
I just don”t want to find out later that I made a big mistake, so I”ll
appreciate your advice.
Larry2007-07-09 15:07, By: Larry, IP: [71.14.18.88]

L2: SEPP question and SS effectYour first year, referred to as a stub year when you start later than January, offers you the flexibility of taking the full annual or the pro rated amount. It is not a problem that you elected the pro rated amount for 2006 as your beginning stub year.
Apparently, you must take 5 years of payments, so your modification date will be 5 years after receipt of your first payment in May, 2006. In 2011, you would take montly installments for Jan-April.
There is no SS due on IRA withdrawals, whether SEPP or otherwise as you thought. Your eventual SS benefit is based on your highest adjusted 35 years of earnings, so if you have less than 35 years, the extra years will average in at -0-. Should you work again, you will increase your benefit more if you lack the 35 years than if you are just replacing lower years with higher years. Your past earnings are all inflation adjusted, and that stops after age 60. Apparently, very little time will elapse between your final SEPP installment and earliest receipt of SS benefits at age 62 and 1 month.
So far, you appear not to have a problem other than drawing down your retirement nest egg earlier than advisable. You also have another IRA you can use as an emergency fund to prevent the need to bust your SEPP on IRA #1. After age 59.5 there is no penalty for amounts you take from IRA #2. Just be sure not to mix up these two IRAs in any respect or move any funds between them until after your modification date. Also, be careful not to have th withholding confuse the custodian will respect to the total amount you need to withdraw from the IRA. Due to a recent ruling from the IRS, I recommend that you retain your current IRA custodian for IRA #1 and don”t make any transfers to other custodians.
2007-07-09 21:42, By: Alan S., IP: [24.116.66.98]

L2: SEPP question and SS effectAlan,
Thanks for the positive reply. I though that I was OK, but it”s nice to hear someone else say that.
Although untimely, the early departure from work will be OK for us. After 35 years with a good salary, a great 401K with up to 7% match, the wonderful 90”s market, and the fluke that I was out of the market in 2000-2003, the 401K is far more than I ever imagined. In addition, I elected the lump sum option so that produced IRA #2.
Both IRA”s are at Fidelity, with them managing the SEPP IRA and me the other. Both have increase well since starting. There is a significant cash fund for emergencies or new toys, life insurance, investment property, and zero debt. Given this we should be fine, especially once the SEPP has run its” course.
Larry2007-07-10 13:16, By: Larry, IP: [71.14.18.88]

L2: SEPP question and SS effectSeriously consider long-term care insurance NOW while you are still insurable as part of your retirement and estate planning.2007-07-10 13:41, By: dlzallestaxes, IP: [141.152.254.197]