starting 72t mid-year
L1: starting 72t mid-yearI want to start my SEPP in July 2009. I talked to a guy at the IRS desk who said the amount taken in 2009 will be different than 2010 because I am starting it midyear. I thought for each calendar year the amount should be equal? (hence Substantially equal payments?)
The guy was pretty sarcastic with me and I left with more questions now than what I had beforehand. Main idea: according to the f. amort. method I can take $12k/year. Can I take $2k/month for the rest of 2009 and take $1k/month for the rest of the time period (Equaling $12k a calendar year for six years)?
(I would call back the IRS but he was so rude and demeaning I had to hang up.) Any help is GREATLY appreciated. Thank you!!2009-07-10 14:48, By: 72t clueless, IP: [184.108.40.206]
L2: starting 72t mid-yearWhat the guy at the IRS should have done was to simply refer you to this site, which, thankfully,usually happens.
In the first year of your SEPP, you have the option of either taking 100% of the annual distribution amount OR taking a prorated amount based on quarterly or monthly amounts. So if you start this month (July) then you can take $1k per month for $6k total, or take $12k in one lump sum, or $3k twice by the end of the year. In subsequent years you will need to take the full $12k, except for the last year when you will have some different options, even to take nothing. Look for a recent post where Alan and I discussed this issue.
I’m contemplating an additional comment about the guy at the IRS and the service we receive from other sections of our Government both current and future, but I’ll just let that thoughtslide.
Jim2009-07-10 15:29, By: Jim, IP: [220.127.116.11]
L3: starting 72t mid-yearThank you Jim! I don’t mean to beat a dead horse, but do I have the option of taking $2k/month for 2009 and $1k/month for 2010 and beyond? If I have to take a lump sum for this year, ($12k in July) do I have to limit myself to take once-yearly lump sum distributions from here on out?
Ironically, when I started to prepare for this last month, the person at the irs desk did refer me to this website! Otherwise, I would never have found it! Thank you again!2009-07-10 15:37, By: 72t clueless, IP: [18.104.22.168]
L4: starting 72t mid-year” … do I have the option of taking $2k/month for 2009 and $1k/month for 2010 and beyond?”
Yes. Your methodology is perfectly acceptable. After my first post I realized that I hadn’t addressed this question. Sorry.
“If I have to take a lump sum for this year, ($12k in July) do I have to limit myself to take once-yearly lump sum distributions from here on out?”
No. You may change your distribution methodology as you see fit from year to year. The key is to take exactly the calculated annual amount each year, except for year one and the last year. HOWEVER, the more times you make changes the more “opportunities” you will have to screw it up so be judicious with your changes.
2009-07-10 16:13, By: Jim, IP: [22.214.171.124]
L5: starting 72t mid-yearFantastic Jim! Thank you so much! I am just going to keep it simple. I am just so relieved to know what I thought I had figured out (based on this website last month) really is going to work. I am still confused about how the irs refers people to you guys. Funny that you know the rules better than they do! (Literally!)2009-07-10 16:20, By: 72t clueless, IP: [126.96.36.199]
L6: starting 72t mid-yearI’m glad that I could be of service to you. If you want to have a great reference guide to 72(t)(q), then get Bill Stecker’s book, “A Practical Guide …” which is available through”Website Sponsors” in the upper left of this page. It contains more information that is understandable than you will ever find through IRS publications.
BTW, the IRS folks are really restricted to only reading sections from IRS Pub 590, etc., so they can’t be accused of “giving advice.” Most folks who post on this site are practicing financial advisors, CPA’s,tax attorneys and actuarieswho have to actually read, understand the tax code and then put it into practice with our clients. So we have “hands-on” experience actually implimenting 72(t)(q) plans.
Good luck with your SEPP Plan.
Jim2009-07-10 16:32, By: Jim, IP: [188.8.131.52]
L7: starting 72t mid-yearjim or anyone else for that matter:
If in the first year you can take out the total amount at different times is there any flexibility to takea pieceout in say February of the year you are setting it up (which was needed to cover some costs and represented an “advance against coming up with the actual 72t calculation”), and then taking out the full year amount in say July oncea finalcalculation is done. Also, what type of flexibility exists with respect to determining the Account value. Lets say I took out a piece in February of the year I set it up as an advance against coming up with the 72t calculation and then took the rest out in July after I had the calculation finalized, couldthat calculationuse the June account balance…or can I pick any reasonable balance during the year…my account balances have not changed very much from the February withdrawal date to July maybe going up 5% but I wanted to use as high an account value as possible so any guidance would be appreciated on setting the account balance amount. When I read the revenue ruling 2002-62 info it says the IRS requires you to use a reasonable account balance based on the facts and circumstances. thanks in advance.2009-07-10 20:42, By: j, IP: [184.108.40.206]
L8: starting 72t mid-yearNO! The interest rate, startingbalance and calculated distribution amount are set in stone on the date of the first distribution.
However, you could make the assumption thatthe plan started in July andpaythe penalty tax on any distribution that occurred before the plan started. But you better have real gooddocumentation and it can’t really be a retro fix or you will be invitingan IRS audit as it would also involve filing amend tax returns for the year in question.
After the first distribution is made, you can make any change you want as long as you know that you will be busting the plan. 2009-07-10 21:03, By: Gfw, IP: [220.127.116.11]
L9: starting 72t mid-yearFurthermore, you can NEVER take out a distribution during the year, and then take one or more additional distributions that by themselves would total your allowable ANNUAL distribution. If you did that, you would exceed the annual limit, and immediately bust your plan.
You can take ONLY pro rata distributions based upon when in the year you start your plan, OR the total ANNNUAL amount. No otherf amounts are permitted.2009-07-10 23:42, By: dlzallestaxes, IP: [18.104.22.168]
L8: starting 72t mid-yearJ,
My non-expert view of your question is this:
If you took a partial (first) SEPP distribution in FEB 09, then you are locked in to using either the DEC 08 or JAN 09 120% Fed Midterm rate (Dec 08 was the higher one at 3.43%) as your max interest rate ceiling. It also requires that you use a balance for your account that was on or before that first (FEB) distribution (and within last 6 months prior to the first distribution date as I have read) but it makes most sense to use either 12/31/08, or 1/31/09 balance so you have a statementfrom your IRA account to verify the starting balance you have used in your calcs. There is no point in waiting till the summer to figure out your actual annual SEPP payment, since you have already locked in the moving parts at that point. (Use age you will attain by 12/31/09 for your calcs of a plan starting in 2009.) With all of that said, you can certainly wait till the summer to take the rest of that first year’s payment, which would either have to add up to (in both cases-when combined with that FEB payment)11/12th’s of your annual calc, becauseit started (the 1st pmnt) in the 2nd month of the year, or adds up to an entire annual distribution. After that, if not recalculating and usingAMORT or ANNUITY method, the payment remains the full year calc value in future years, and can be taken in a variety of ways (monthly, qtrly, etc.) if your custodian can handle it. Simple Example: Calc yields $24,000 as full year payment. You can take (over course of first calendar year) either $22,000 or $24,000 because you started in FEB. When I started my 2nd SEPP with an different IRA, it was MAY 07. I instructed the Custodian, who was Vanguard (after submitting papers with my calcs) to send me 5 months worth of my annual calc in MAY, and then switch me to monthly payments of 1/12 of my annual calc for the rest (last 7 months) of the year, and to continue that monthly payment into future years. In my case, I took the full year option for payment in first year. I am not an expert, but I think what I am saying is correct.One more thing.. you may have caused a paperwork problem by taking a FEB payment without first telling the custodian of your SEPP plan, especially if they would have issued a 1099-R for 2009 with code “2” for valid SEPP plan payments. KEN2009-07-11 14:13, By: Ken, IP: [22.214.171.124]