starting a 72 t

L1: starting a 72 tThank you in advance. Just retired, Will recieve a small pension from my last employer, I will be 51 this year and would like to start a SEPP.I rolled over my 401k to a QP IRA at Vanguard, the total is $113000 I will also be recieving $82000 in about 2 months. I would like to buy a muni bond for $100,000 for the SEPP, it pays twice a year and would provide me with needed income to make up for the small pension. It matures in 12-2030, and has a”call” in 12-2020. What are the pros/cons to this plan? I have yet to see any post about bonds in a SEPPaccount. How wouldI go about getting this set up ifI choose to go this route??What if the intrest rate is over the 120% mid-term? Could it go to a IRA “sweep account” ?2011-02-20 19:16, By: jiffy mix, IP: [99.191.82.32]
L2: starting a 72 tI hope you will enjoy retirement. I’m not a big believe of using municipal bonds in any qualified plans, two reasons: 1) they have a tax favored interest rate that will be hidden when used in an IRA; and 2) you have to look at the financial condition of the issuing municipality. I’m not trying to give you investment advice, but if I were you I would consider other alternatives like dividend stocks or corporate bonds. The interest earnings on the SEPP account are of no relevance to the calculations. If the fund earns a higher return, the assets will grow. If they earn a lower rate, the assets will deplete faster. Age 51 leaves a long period to retirement. Consider putting some of your IRA assets in a separate account for emergencies. But, before you begin, start by reading our Planning Pointers.2011-02-20 19:39, By: Gfw, IP: [24.148.10.164]

L2: starting a 72 tJiffy Mix,Don’t confuse the “reasonable Interest Rate” (which is the max 120% rate you can use in the calculator on this site for plans starting in the current month) with the “Actual Interest Rate” (also on the calculator) that is what you expect your investments to yield on average over time. They have no connection. In the calculator, the “actual” rate is used to predict what your year end balance will be each yaer after the withdrawal and the earnings are computed.For example, on this site’s SEPP claculator… using a value of $113,000 in IRA for SEPP plan, and your age of 51 (needs to be age you attain at end of year you start withdrawals, so this may really need to be 52 for you) and Amortization method, with current Reasonable Rate of 2.34%, and plugging in a hypothetical annual yield for your muni of 3.5%, the following happens:The withdrawal in year one exceeds the interest earned by $1,200 (hard to sell the $1,200 extra you will need from the $100K bond..and this concept could also apply to being a problem with having only CDs to support annual payments) By age 59, the withdrawal exceeds the yield by $1,500 per year, caused by declining principal that is making the 3.5% yield. I then plugged in future max Int rate of 2.94%, and same 3.5% hypothetical yield, and it starts with withdrawal exceeding yield in first year by $1,800 and by $2,200 in year you turn 59. Try out the calculator on this site, and you can see how you should not equate the two interest numbers, in terms of thinking if your investment rate is higher than max allowable rate for computations of your withdrawals, then your plan of withdrawing only interest earned will work ..Gordon’s point about avoiding investments in an IRA inlower yield tax freeMuni’s is right, since after getting lower yield than may be available on a taxable bond or CD investment in your IRA, you will pay taxes on all the money pulled out of that IRA in the future, including the “tax free” income that thought you earned, since it all ends up in the pre-tax IRA from what I know. KEN2011-02-20 20:09, By: Ken, IP: [71.192.121.212]

L2: starting a 72 tNote: Postedbefore seeing prior responses. But basically concurs with them.By “QP” IRA, I assume you mean a rollover IRA. What is the source of the 82k you will receive, ie. is it in a retirement account now?Even if you would have total IRA funds of around 200k, the SEPP calculations would only generate very roughly 10k for your annual distribution. Is this enough to live on along with other income sources?With respect to the investments in your IRA, you can use a wide variety of securities. Muni bonds have typically paid out lower interest rates than most other bonds and therefore did not make sense to hold in IRAs. That may have changed in some cases, but you should check carefully not to accept a lower yield because when you take your SEPP distributions, this income will be taxed like any other income at full ordinary income tax rates. So you would not get the tax advantage that a muni would have in a taxable account. Also, if this is just a single bond, you could not sell just part of it if your SEPP distribution amount was more than the interest yield.Whatever yield you get has no relationto the dollar amount that you must take out of the SEPP account and no direct relation to the 120% mid term. But the higher your yield, the more liquidity you will have and the longer your IRA funds will last. For example, if your SEPP distribution is 10k and your interest payment is 6k, you are drawing down your balance by 4k per year. If your interest payment was 10k, your IRA balance would stay about the same by the time your plan ended. If you set up a brokerage IRA for the SEPP, any bond interest would be swept into a MM fund or bank cash deposit and you could take your SEPP distribution from these funds. If the yield was too low, then you would have to sell the bond.2011-02-20 20:23, By: Alan S., IP: [24.119.230.17]

L3: starting a 72 tThose were my thoughts. The muni is taxable,but no ATM tax. It pays 9%, twice a year. It is rated A- by S&P. It is callable in 2021. I would buy a $100k bond, the payments would go to a IRA sweep MM account and take the predetermined amount from that account. The 82k will go into another QP IRA, for other types of investments.Does this make sense? Thanks again.2011-02-20 21:32, By: jiffy mix, IP: [99.191.82.32]

L4: starting a 72 tWhy are you worried about an AMT tax ( not ATM) ?You should be more concerned about why a municipal bond, or a taxable bond for that matter, would be paying 9%. If it were true, then the U S Government would be buying them to pay off the interest on the national debt. And all of the other states and municipalities would be investing in it also. And so would all foreign countries.2011-02-21 01:51, By: dlzallestaxes, IP: [96.227.217.194]

L5: starting a 72 tNot worried about the AMT tax, just giving the details of the bond. Edited by Gfw… We are here to talik about SEPP plans, not a particular investment in a SEPP plan.2011-02-21 16:02, By: jiffy mix, IP: [99.191.82.32]

L5: starting a 72 tLet’s look at your statement …”The muni is taxable,but no ATM tax. It pays 9%, twice a year. It is rated A- by S&P. It is callable in 2021.”Muni bonds are NOT subject to federal income tax if held outside of an IRA. If your state has an income tax and the bond is from your tax state, then it is tax-free at the state level also. By placing muni bonds into your IRA you convert tax-free income into taxable income at ordinary incometax rates (the least favorable rate) for both federal and state. This is not a good situation. Also, muni bond incomeCOULD make your tax return subject toFederal AMT taxes, depending on your total tax situation.Have you noticed the news lately about states and local municipalities who issue muni bonds are having financial difficulty? Some financial analysts are predicting potential default of many states and municipalities and if this happens their muni bonds could become worthless. Also the rating agencies have had problems getting their ratings right for several years now. And since you plan to invest in one (1) bond issue you totally ignore the basic investment principle of “diversification” which you will not have. Finally, the 9% interest rate raises the red flag of how secure is this municipality / state to continue to make these payments. Generally the higher the interest rate the greater the risk because more risky investments have to pay higher rates to attract investors. Please don’t identify the the specific muni you are looking at as it doesn’t matter and nobody is going to pass judgement on any specific bond.Finally consider this fact: As real-world interest rates go up, the value of your 9% bond goes down, and vice versa. Given the low interest rate world we are living in today, rates can only go up over time which will reduce the principal value of your bond.My suggestion is to find an Investment Advisory Representative (IAR) with a Registered Investment Advisor (RIA) firm and do some serious financial planning before starting your SEPP Plan. Sometimes, and this is one of those times, it is worth it to spend some bucks for some good advice.Good luck.Jim2011-02-21 16:34, By: Jim, IP: [70.167.81.119]

L6: starting a 72 tThe part that I edited out. The CUSIP 854733DQ2 – you can find it using Google. It has a 9% yield (it doesn’t pay 9% twice a year) and it is issued as a CA bond “Stanton California Redevelopment Agency Tax Taxable Consolidated Redevelopment Pj Housing A”. I didn’t see a rating on it, but then I didn’t look too close either.Based on the yield of 9% (lots higher than the corporate bond rates), the risk has to be much above average.http://california.municipalbonds.com/bonds/issue/854733DR02011-02-21 16:49, By: Gfw, IP: [24.148.10.164]

L7: starting a 72 tBond holders are paid from the additional tax revenue generated by the redevelopment vrs the pre redevelopment revenue. But to understand why these yield so much, perhaps it is due to the cities using the tax revenue as a slush fund. And Brown now wants to disband these agencies:http://www.latimes.com/news/local/la-me-redevelopment-20110218,0,7617169.story2011-02-22 04:52, By: Alan S., IP: [24.119.230.17]