starting a 72-t
L1: starting a 72-tI am starting a 72-t within the next few months. My IRA has already been established, but I have not invested the $$ yet. Can I invest the $ first, then apply for the 72-t after the investments have been made? Or do I have to keep the $ in cash until the 72-t has been established? 2009-06-16 19:25, By: PCH, IP: [18.104.22.168]
L2: starting a 72-tYou have to alreadyhave an IRA with significant balances in one or more accounts in order to fund a SEPP 72-T. You cannot all of a sudden decide that you want to have a SEPP and put in a large amount of money to fund it, because you are limited in the amount you can make in new contributions in a calendar year.
You might mean that you have set up a new IRA account that you transferred cash from an existing IRA, and that you intend to use this account for your SEPP 72-T investments and distributions. That is perfect. You could have transferred investments or cash, or any combination. The income, and principal if necessary, are used to create cash to make distributions at any frequency during each calendar year. The annual amount is calculated based upon the account balances, your age, and maximum of 120% of the federal interest rate. The first year you can take either the annual amount, or prorata based upon the month that you start taking distributions.
There are a zillion postings on this site to explain various nuances about SEPP 72-T, or you can buy Bill’s book. (It’s a fantastic reference.)2009-06-16 20:00, By: dlzallestaxes, IP: [22.214.171.124]
L3: starting a 72-tIf the IRA is funded with cash at this time, you can invest it either before or after you start your 72t plan. You can also invest it before or after the date you use to establish your initial account balance. You can also change your investments any time you wish during the SEPP plan.
Probably best to avoid illiquid investments in this IRA or those that have to be sold with an early withdrawal penalty (CD) or some form of early redemption fee (mutual funds) as you will need to distribute your SEPP at least annually.2009-06-16 20:28, By: Alan S., IP: [126.96.36.199]
L4: starting a 72-tAlan’s response is “dead-on” in answering your questions.
I don’t have any idea how you plan to run your investment plan, but since you don’t plan to start distributions for a few months, you might want to stay in cash for a while to see where this market is going through the summer. Remember the old addage, “Sell in May and go away.” Summer time cancreate some really wild and destructive market swings.
But like Alan said, whenever you make investment decisions is totally up to you and you can make changes anytime. The only catch is to be sure you don’t make transfers either into or out of your SEPP designated IRA’s to other, Non-SEPP designated IRA’s.
Jim2009-06-16 21:18, By: Jim, IP: [188.8.131.52]
L5: starting a 72-tI started a SEPP and my IRA money is invested in a 5 year CD that pays the interest monthly to my IRA Share account and that money is transferred as my payment to my savings account each month. In 5 years I will have to decide how to invest the money again. If interest rates shot higher I could break the CD and renivest the IRA money in a new CD.
Twag2009-06-20 19:49, By: Twag, IP: [184.108.40.206]
L6: starting a 72-tQuestions…
Do you have assets in the SEPP other than the CD?
Which of the 3 distribution methods did you useso that the interest on the CD exactly equals the calculated distribution?
2009-06-20 19:56, By: Gfw, IP: [220.127.116.11]
L6: starting a 72-tAs a follow-up to my previous questions, you made the statement that…
>>If interest rates shot higher I could break the CD and >>reinvest the IRA money in a new CD.
The annual distribution from your SEPP has nothing to do with the interest rate on an investment – the calculated annual SEPP distribution will remain the same unless you bust the existing plan, pay penalties on previous distributions and then restart a new SEPP. 2009-06-21 13:16, By: Gfw, IP: [18.104.22.168]
L6: starting a 72-tTwag:
Let me see if I understand what you have going. You have an IRA which you use for SEPP distributions, funded by a 5-year CD. Monthly distributions from the SEPP IRA go into another IRA account at the same bank. Next you have funds distributed from the second IRA account into a regular, Non-IRA savings account. Is that how it works?
Like GFW was saying, the amount of dollars distributed from your SEPP IRA is irrelevant to the amount of monthly interest dollars you areearning on your CD-funded SEPP IRA. But for sake of discussion, let’s assume the amount of dollars earned each month in your CD-funded SEPP IRA is greater than your calculated, required SEPP monthly distribution. If so then you’re good … so far.
Now the next question is, did you include the second IRA account as part of your SEPP Universe for your calculations? Again for the sake of discussion, let’s assume you did include both accounts in your SEPP Universe, and that you had some nominal amount in the second IRA account. Let’s also assume that your calculated, required SEPP monthly distribution amount is $100, and that you are generating $110 per month from the 5-year CD funded SEPP IRA. Finally let’s assume that your calculated, required SEPP monthly distribution amount of $100 is moving from the second IRA (part of your SEPP Universe) to your Non-IRA savings account. If this is the situation then you are OK.
However, unless the second IRA is part of your SEPP Universe, eventhough the relative dollar amounts in my example above are in line with your plan,then you already have a “BUSTED PLAN.” If you only have one SEPP IRA in your SEPP Universe, then the dollars distributed must comply with the calculated, required SEPP distribution amount, which is GFW’s point. The odds of this being the case is rare!
Jim2009-06-22 13:32, By: Jim, IP: [22.214.171.124]
L7: starting a 72-tAnother caveat.If the monthly interest is paid late in the month, you might run into a problem with transferring the interest between accounts, and also making the Dec disbursement before 12/31. If the interest comes late in the month, then I suggest keeping the equivalent of 1 month’s interest in the disbursing SEPP 72-T as a safety measure, and the monthly interest would replenish that safety amount each month when transferred.2009-06-22 16:28, By: dlzallestaxes, IP: [126.96.36.199]
L7: starting a 72-tOK here is what I did. I rolled my 401k into an IRA share account. All of that money I used to calculate my SEPP payment. I then invested most of the money in a 5 year IRA CD and kept about $10,000 out in the IRA share account as a buffer which by the end of the5 year CD will be down to about $2,500 as the interest payments each month are slightly less than my SEPP payment….which is a nice coincidence I think. Each month the IRA share account pays the SEPP payment to my Savings account.
After 5 years I will have to find a new investment.
Twag2009-06-26 18:33, By: Twag, IP: [188.8.131.52]
L8: starting a 72-tSounds fine to me.2009-06-26 22:07, By: dlzallestaxes, IP: [184.108.40.206]