L1: SEPP set-upI am currently 53 years old and have about $425,000 in a single traditional roll-over IRA account with Vanguard. Due to my ‘between jobs’ status (I took a buy-out from my company in 2/09), I find it would be useful to access some of my retirement funds to provide a small financial ‘backstop’ to my income needs. My understanding of a SEPP is such that it will do that while avoiding the 10% tax penalty. Ialso have other funds in a Roth IRA and a taxable brokerage account (emergency funds) aside from the traditional IRA account with Vanguard.
Having given the vital statistics, How do I proceed on making these funds available while not getting myself in trouble down the road with our friends at the IRS? I’d like to use the RMD which would require a new assessment every year, right? What kind of documentation do I need every year using this method? I’ve read quite a few of the posts on this great site and learned much. However, I ‘d like a start to finish approach if you can render one. Thanks for the great site and advice.2009-07-03 01:09, By: Mark, IP: [18.104.22.168]
L2: SEPP set-upMark,
I was in the same situation 3 years ago at age 53 and needed a way to supplement my income until I turned 59 1/2. I used 72(t) to make that happen.Here’s how I did it…
You can set up as many IRAs as you want, so I set up IRA1 with $300K in it and then using this site figured out the maximumI could withdraw from the account under 72(t). Once I did that, I put all of the details of the account (interest rates, allowable date for change, etc) into a 2 page document for the record.
The next year,I set up a second IRA (IRA2) and did the same thing. Setting up multiple, smaller IRAs lets you adjust your income in smaller increments without tieing up an entire IRA.
IfI need more income,I can set up a third IRA in whatever amount I need to produce the desired income level.
The key to a 72(t) is to make sure yoy get the numbers correct, document it for future use (e.g. IRS audit), and then don’t touch it for the minumum req’d period – in your case age 59 1/2 (which is the longer of 5 years OR 59 1/2).
I can send you and example of howI documented my two IRAs if you’d like.
Scott2009-07-03 01:41, By: Scott, IP: [22.214.171.124]
L3: SEPP set-upMark,
Despite the fact that you have the advantage of other funding from your Roth or taxable accounts, it would still be to your advantage to use one of the two fixed dollar 72t calculation methods rather than the RMD method. The3 main advantages of the fixed dollar methods are:
1) They yield half again as much per dollar of initial balance.
2) You can still make a one time switch to RMD if you wish to reduce your payout. If you start with RMD, you lose this option.
3) Having to make a complete new calculation each year increases your risk of making an error in just one of them and that would bust the plan.
You should calculate how much you think you will need each year. You do not have to pad this since you WILL have both emergency funding sources as well as other IRA accounts to start a second 72t if you need it later on. Each one of those 72t plans are independent of the other. The other traditional IRA accounts are created by the balance you will not need by virtue of using a fixed dollar method rather than RMD.
You would probably be best not to use your Roth for emergency funds unless you need a tax free distribution from your regular Roth contributions.
2009-07-03 03:37, By: Alan S., IP: [126.96.36.199]
L3: SEPP set-upThanks so much for your response. It appears that the use of multiple SEPP IRA accounts is a good tool if needed. That will allow one to tailor the income stream. It appears as there is quite a bit of information you should consider prior to setting this up.
It’ll be awhile before I need to employ the SEPP and in the meantime, I’ll continue to educate myself. Great website!2009-07-03 12:04, By: Mark, IP: [188.8.131.52]
L2: SEPP set-upMark,
If the RMD annual payment on $425K (using age 53 in calculator, it is $13,535.03) is sufficient for you, I would recommend plugging that into the reverse calculator on this site and looking at what the AMORTIZATION method would require for a starting balance to pay out the same amount per year. It shows as only needing $283,747.56 in the IRA, so you could split that rollover IRA and only leave the $283K+ in it for the SEPP plan, while the $141K+ balance is in an untapped IRA. If you turn 54 this year, the figures have to be reworked, using age 54. Why tie up an extra $141K+ in the SEPP IRA if it is not needed?? It leaves the unused $141K+ IRA for 2nd SEPP if ever needed, or for penalized withdrawal in an emergency if that was needed without creating the 10% penalty on the entire SEPP plan to date. You can also simplify by using that first annual calculation as the amount taken out each year the plan has to run under AMORT.. with no recalculation as is needed in RMD. And finally,if your fortunes change, andyou need less SEPPP $$ prior to passing age 59 1/2, you can do the “one time” switch toRMD on the activeAMORT SEPP Plan, which will lower the payments going forward. You can’t switch back if you later need more money again, but the other IRA can be used to start 2nd SEPP as Scott has done. KEN2009-07-03 03:26, By: Ken, IP: [184.108.40.206]
L2: SEPP set-upIf you want financial and tax planning advice, then you should disclose more information.
1. Are you planning to work in the next 6 1/2 years until you are 59 1/2, or are you now “permanently” retired ?
2. How much is in your ROTH IRA ?
3. How much is in your Vanguard brokerage account ? What is its present “unrealized capital gain or (loss)” status ?
4. Is there any prospective inheritances in your future ?
5. What is your home ownership/mortgage situation ?
6. Any vacation home or other real estate ?
7. Any college obligations now or coming up ?
8. What provisions have you made for health care coverage ?
9. Long-term care insurance ?
In general, I would use the brokerage assets before setting up a SEPP 72-T, especially if I planned to get another job, if possible. Also, consider the taxable income already this year. If low, then maybe convert some to ROTH IRA in 2009, or 2010, when your tax rate may be low. Why get yourself locked into a 6 1/2 year plan if you only need the supplemental income until you getb another job ?
As you can see, there is a lot of valuable advice thaty you should get before just setting up a SEPP 72-T plan. Also, there are several exceptions to the 10% penalty that you might qualify under.
Further, while unemployed the first $ 2,400 in 2009 is gtax-free, and you may qualify under COBRA for a 65% subsidy for you health insurance.2009-07-03 03:31, By: dlzallestaxes, IP: [220.127.116.11]