L1: starting 72(t)
Thank you for an excellent site!
I have been looking at setting up a SEPP for about a year as my husband is retiring early and he is filing for disability…but do not have a SSI ruling that he is permanently disabled. As of today, he is not returning to his job because of illness and it
looks unlikely for the future. I am not sure if I understand exactly what would be needed to declare he is disabled, which would seem to be beneficial in avoiding penalties.
Besides the disability question, I am wondering if I have to tell his IRA custodian, tdameritrade about setting up a SEPP? It seems to be a pretty much self-service operation. Can I just develop the plan, make the withdrawals, file the 5329, and maintain
excellent records? Is the SEPP IRA a particular kind of account he must be in, or just the name of the 72(t)? (Might be a dumb question).
Another question: If, next year, I am an excellent investor, miracles rain from heaven, etc. and his fund account appreciates significantly, can I opt for the annual recalculation? If some appreciation occurred and we needed more funds, must the annual recalculation
happen every year of the five years, or can it happen only once?
Thanks for all your advice, and the calculators, you have a wonderful site.
2011-07-27 02:14, By: akerlin, IP: [220.127.116.11]
L2: starting 72(t)
Here is a link which contains the definition for disability required in order to avoid any early distribution penalties. Being awarded SSD would mean that he is likely to meet the definition, but it is not automatic. Your husband
should submit medical analysis to the IRA custodian and request that any distributions be coded “3” and that would eliminate the need for a SEPP, at least from HIS IRA. If the SSD payments plus his IRA distributions would not be enough to live on, you might
need to start a SEPP from your IRA as well, if you have one.
SSD rulings take a long time, and he may not be able to wait for the award, but if he starts a SEPP from his IRA because he cannot get the “3” code from the IRA custodian, he can just terminate the SEPP if he later gets the coding.
With respect to the terminology, “SEPP” stands for substantially equal periodic payments which avoid the early distribution penalty, and are typically taken from an IRA account or more than one such account. Any such accounts
used to total up the initial account balance are considered part of the SEPP plan and informally referred to as SEPP or 72t IRA accounts. But the actual IRA is no different than any other IRA and the custodian does not need to rename it or really even know
about it. That said, it is better if the custodian DOES know about the plan and understands and supports it, as they can help you avoid errors if they are knowledgeable. But many are NOT knowledgeable.
While you can start a recalculation sub method for the annuitization or amortization plans, these are very subject to error, and normally are not recommended. They are rarely used, but you need to start these plans under recalculation
method from the start, so a 6 year plan would have 6 different calculations.
The one time switch to the RMD method almost always reduces the payout. It could increase the payout if the IRA gained 50% or more, but this is very rare. For the one time switch, you can just wait until you want to to make the
I recommend that you read up some more on the planning pointers and the recalculation procedures on this site if you still want to consider that. There are alot of variables to consider under the circumstances, but you should
not start a SEPP unless you have no other choice to avoid the penalty.
2011-07-27 04:11, By: Alan S., IP: [18.104.22.168]
L2: starting 72(t)
My understanding is that to be considered disabled, your husband would have to have a written letter from a qualified physician that he is unable to work and that it is likely that this condition will continue for an indefinate time. I would think that
this would be needed as part of his SSI application as well. Was there such a letter? Do you expect to get approval for his SSI benefits? It may be that the IRS will accept his qualification for SSI as proof of disability or it may not. If not, then the
IRS will likely have some method of qualification of their own but I am not sure what that might be.
I don’t know that you HAVE to tell the custodian whether or not you are setting up a SEPP plan but it can’t hurt. From their viewpoint, a SEPP is simply a routine distribution plan. Custodians used to have a separate form that one filled out to begin a
SEPP plan. Vanguard did this when I started my SEPP back in 2005. My understanding is they they do not do this these days, so probably do not have a special SEPP form anymore. They probably do have a routine distribution form of some kind, though. IS there
any reason not to tell the custodian that you are starting a SEPP plan?
There is nothing special about the account for a SEPP. Typically, it is just a standard IRA. Will your plan involve more than one IRA? If not, then the number of that account will be used to identify the SEPP plan. If you have multiple IRAs involved,
then more care is needed to make sure that all of the IRAs committed to the SEPP plan are identified by account number and that these IRAs are kept completely separate from any non-SEPP IRAs you might have. Note that the “you” to whom I refer is not both
you and your husband but only the individial who has the SEPP.
Your basic plan looks good to me. That is basically what I did and it seems to have worked very well. Add to this,
Be Vigilant. Never assume that your custodian is incapable of error. Check the distribution amount for every check they send you or every direct deposit they make. Also check the total amount distributed for each year that the SEPP runs
in case they distribute the wrong number of payments. If they do make an error, you want to catch it and get it corrected ASAP. This is why most of us here advise people not to take a SEPP plan distribution after the 15th of the month. In December, you
may well need a couple of weeks to correct any problems and you want to be sure that the appropriate correction has been made BEFORE the year ends and the distribution amount is reported to the IRS.
Recalculating a SEPP is not something that you can turn on and off as it is convenient. If you wish to recalculate your SEPP distribution each year, you should state that in your SEPP declaration letter, which is just a statement of your intent as regards
how your SEPP is set up. You will then HAVE to recalculate your distribution each year, no matter how benevolent or how nasty the market has treated you. In good years, you will get extra money via this technique but in poor ones, you will get less money.
In most cases, the simpler you can make your plan, the fewer moving parts it will have, and the less likely it will be that problems occur. For this reason, most of us choose to not recalculate unless we are using he minimum distribution calculation method.
One of the things that really confused me when I was considering a SEPP plan was the wording that the government uses in describing such plans. I mean, the acronym “SEPP” stands for Substantially Equal Periodic Payment. While that sounds fine, there is
nothing whatever “substantially equal” about it. The allowed SEPP calculation methods deliver an EXACT distribution amount and anyone with a SEPP plan going (who is not recalculating) MUST withdraw that exact amount or risk busting the plan.
I am sure that the pros on this site will be happy to correct anything I have said here, should there be a need for correction. This is how those of us who are not pros learn and are then able to offer better advice next time.
2011-07-27 04:19, By: Ed_B, IP: [22.214.171.124]
L3: starting 72(t)
The explanations above are very thorough, and right on point. Just be careful not to get confused, nor to confuse a financial institution or advisor, with a SEP IRA (1 “P”) which is a retirement plan for a Self-Employed taxpayer, and has nothing to do with
a SEPP 72-T plan. In discussions they obviously sound as if they are the same thing, but they are not. Only the IRS would have 2 tax provisions that “sound” identical.
2011-07-27 04:53, By: dlzallestaxes, IP: [126.96.36.199]
L3: starting 72(t)
Thank you for your replies!
My husband is filing for long term disability. I was reading the insurance plan and it sounds as if whatever income he gets willcount toward how much the insurance policy pays.This might sound ugly, but money is not exactly abundant around here, and should
I delay starting this until I know more details? This is like day 3 of disability, and I am counting and fretting… would rather pull all the cash and pay off house note, but that is too expensive with the penalties. You all seem very smart about money, and
might know more about this than me!
And we do have doctors who are signing short term disability forms and heis still undergoing tests.His illnesswill be long term, most likely.
2011-07-27 22:23, By: akerlin, IP: [188.8.131.52]
L4: starting 72(t)
1. You say that the doctors are preparing “short-term” disability forms. That will not qualify him for either the SS disability benefit, nor any exclusions from IRA early distribution penalties. Only long-term “permanent disability” qualifies.
2. Who paid for the disability insurance policy ? If your hudband with “after-tax” dollars, then all of his benefits are TAX FREE. If his employer paid the premiums, then all of the disability benefits are TAXABLE.
3. Speak to a GOOD insurance expert, and a CPA/tax advisor to help youn understand all of the nuances of this situation.
2011-07-27 23:14, By: dlzallestaxes, IP: [184.108.40.206]