Starting a SEPP Plan

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L1: Starting a SEPP PlanHello,
I am 55 and would like to start taking equal payments using the 72T exemption. My concern is that it seems if I don’t get the calculations exactly right, the IRS will retroactively charge a 10% penalty on all my distributions. My tax account doesn’t know anything about the 3 calculation methods. What is the best way to be sure of calculating the correct amounts?
Also, lets say I have calculated my yearly distribution is $13,000. Can I take %12,500 each year to make sure I don’t exceed the allowable amount or will the IRS charge the penalty if I don’t take the exact amount (whether i take too much or too little)?
Thank you in advance for your help.

2011-06-30 23:56, By: Brian, IP: []

L2: Starting a SEPP PlanStart with the calculators… take out no more and no less than the calculated amount.
However, based on your initial question, start by taking some time and reading the planning pointers and FAQ before you do anything.2011-07-01 00:18, By: Gfw, IP: []

L3: Starting a SEPP PlanThank you for your reply. I have been investigating this for a number of months, talked to my tax man, and to my financial planner. I believe this plan is a good idea for my situation.

I just had a concern about the calculation and the possible 10% penalty if the calculation is not 100% correct. I did notice that different calculators have some different results and wondered about the penalty if you are off by even a few cents.2011-07-01 05:44, By: Brian, IP: []

L2: Starting a SEPP PlanBefore you consider a SEPP 72-T, there may be options that may be preferable to consider and evaluate:
1. Are you still working, or did you retire voluntarily or involuntarily ?
2. Do you still have a 401-K, or did you roll it over to an IRA ?
3. How much have you already earned in 2011, and how much will your spouse earn ? ( i.e. How much will your taxable income be in 2011 if you wait until later in the year, or Jan 2012 to start your plan ?)
4. What is your birthdate ?
5. How much was the balance in your IRA at 12/31/2010, and the highest month-end balance in 2011 ?
6. Do you get a pension ?
7. Do you have outside resources ?
8. Did you ever make non-deductible contributions to any IRA, or after-tax contributions to your retirement plan at work ?
9. Is their any “company stock” in your 401-K or retirement plan from work ? ( This is called “NUA STOCK”.)
10. What will you be doing for health insurance until you are 65 for Medicare (unless it gets raised to 67 under some current proposals) ?
11. Have you developed a RETIREMENT PLAN for the next 10-15 years, with a spreadsheet ( manual or computerized) ?
All of these questions and answers are important in deciding how to approach your retirement. If you are not sure why these questions are important, purchase the book available on this website.

2011-07-01 00:31, By: dlzallestaxes, IP: []

L3: Starting a SEPP PlanThank you for your detailed reply dlzallestaxes.

I believe the SEPP plan will work for me because I am 55 and already retired.
I have a 273K in a traditional IRA and 90K in a ROTH
Icould use some income now (and until I’m 59.5).
I have developed a basic retirement plan and presented it to my financial planner and tax man.
I do receive a pension and social security and both increase in monthly value the longer I wait.
I’m not married
Currently, I have a negative cash flow (before any SEPP payments) of $1,300/month.
My initial calculation shows that the SEPP payment (on the total Trad IRA) is around $1,100/month
I would be 60 after the 5 year SEPP requirement.

I wish my tax accountant would have asked me these kinds of questions 🙂
Please excuse my ignorance as I don’t know if this is proper in this forum, but, do you perform this kind of work for other clients?

2011-07-01 06:02, By: Brian, IP: []

L4: Starting a SEPP Plan# 5 is an important item to keep in mind.
Your 2011 tax situation would be important to consider as far as when to start, and if you should take a prorated or full annual distribution in 2011.
I do this type of planning with all of my clients, or at least those who are willing to pay for it. Some think that it is better to use their broker or financial advisor because they don’t charge them. I tell those that I hope they get better advice than what it’s costing them i.e. Is it good for nothing ?????
I’ve found, unfortunately for clients, that many financial advisors do not do the appropriate tax planning, and only look at the cash flow or investment aspects. Also, many/most financial and even tax advisors are unfamiliar with the nuances of SEPP 72-T and NUA tax provisions, as well as 401-K distributions after 55. Most do not even know about this website.
Several posters to this website have tracked me down, and are now my clients. I do not know the protocol as to how much I can indicate here if you want to contact me directly. I’ll check with the “moderator”.2011-07-01 14:54, By: dlzallestaxes, IP: []

L5: Starting a SEPP PlanIn my initial response I forgot to mention the following about your situation :
The formula sets a “maximum interest rate” at 120% of the federal interest rate. If you wanted to withdraw less than the maximum that you could do, then you can either use less than your full IRA account balance as your SEPP 72-T “universe” by transferring the excess by using the “reverse calculator” on this website, or by lowering the interest rate you use in your “plan”.
However, based upon your latest response, it looks like youmight need the full 120% rate and the full IRA balance to provide the amount that you need. As stated previously, you cannot arbitrarily just decide on your own to take less than the “calculation”. You must adjust the factors in your calculation (other than your age) so that your plan provides the amount that you need, if possible.2011-07-01 15:10, By: dlzallestaxes, IP: []

L6: Starting a SEPP Plandlzallestaxes,
Thanks again for the info.
Yes, I believe I will try to take our the maximum distribution that is allowed. Then the remaining negative cash flow (around $2,500/year) can be easily covered by my Roths or my savings. I also have my home that is free and clear.
One little complication is that the total trad IRA amount I provided you is split into 4 different accounts. So I will have to either consolidate them or manage each account separately.
I would like to speak to you off-line if that is allowed.2011-07-01 15:31, By: Brian, IP: []

L7: Starting a SEPP PlanI’m waiting to hear how we can exchange contact info within the rules of the website.
You could get a Home Equity Line of Credit to use whenever you have a cash shortfall, and then repay it after reaching 59 1/2.2011-07-01 18:36, By: dlzallestaxes, IP: []

L7: Starting a SEPP PlanBrian:
Having 4 separate IRA accounts can cause real problems. My suggestion from the financial planner perspective is to establish a new IRA account using a brokerage account platform. If one of your IRA’s is already in a brokerage account then simply transfer the other 3 into this account. Do whatever you must to get all 4 accounts into one brokerage account IRA. That way you can buy and sell assets within the brokerage account and take your distributions without fear of busting the plan. You will avoid the potential problem of “partial transfers” among the current 4 separate acconts which will be an automatic “bust.”
I may be wrong but I feel from what you have said that you need to expand your SEPP Education by reading the FAQ’s and Planning Pointers located on this site. This will help clear up a lot of questions that I sense you may have.
Jim F2011-07-01 19:21, By: Jim F, IP: []

L8: Starting a SEPP PlanHi Jim,
Thank you for your reply and advice.
Yes, I have already read the FAQ’s in its entirety then went back to read those question I thought were pertinent to my situation. I have also gone thru this entire site map (and other web sites).
If you could be a little more clear, what other question do you think I have or topics that you think I am missing? Much appreciated.

Brian2011-07-01 20:28, By: Brian, IP: []

L9: Starting a SEPP Plan
Good afternoon, Brian. I’m sorry for taking so long to respond but I don’t check e-mails on the weekend, and the holiday just added to things.
As to your not having a full grasp of 72(t), it was just a “feeling” I had. I don’t have any specific elements that I can lock onto. If you’re comfortable with your research and have received all answers to your questions, then press forward with your
plan. We’re always here and more than willing to answer your questions. Sometimes it takes several answers to the same question for the light to come on so don’t hesitate to keep asking and maybe one of us will be able to hit on the right wording to make
that light come on. I remember driving TheBadger nuts with one question that he had to answer in more that one way for me to “get it.”
Do you understand my suggestion that you use one brokerage account for your SEPP Plan IRA so that you can put whatever assets you like into this account? Using this approach will allow you to buy, sell or exchange at will without endangering your plan.
If you are using an independent financial advisor with a Broker / Dealer relationship (this eliminates the “insurance-salesman only” advisor) then he/she can further explain how to use a brokerage account. If you use an on-line accountthey use the brokerage
account platform and you may already be familiar with this concept. In any case, call us if you have any questions.
Jim F
2011-07-06 16:59, By: Jim F, IP: []