thinking about changing my IRAs in SEPP universe

L1: thinking about changing my IRAs in SEPP universeI originally set up my SEPP/72(t) with the expectation that I would leave it untouched during its 5 year run in order to minimize any suspicion of breaking the rules by the IRS. I am now 50% complete on the execution of my plan and I am considering a change in the structure of the two IRAs I used to define the plan and wanted to describe my proposal to the discussionforum to get any comments about whether I would be doing everything correctly.
Originally I had one IRA that contained all the funds and this is the account that my monthly distributions have come from. A second IRA was established to take the excess fund growth from the first account. The first account grows faster thanwhat I can withdraw from my distributions and the excess goes into a cash account that earns a pittance of interest. Therefore I transfer this excess interest into the second fund which earns a much more respectable rate.
Now the second account is looking like a much better financial instrument than the first and I am considering moving the balance of the first fund to the second fund and drawing my distributions from the second rather than the first.
Without getting into the logistics of coordinating the distributions to maintain the same annual distribution is there anything fundamentally wrong with this plan and are there any pitfalls I should be careful about making this change?2006-01-04 00:50, By: Keith, IP: [71.208.232.156]

L2: thinking about changing my IRAs in SEPP universeHello Keith:
I am getting your use of “accounts” and “funds” confused. In short, “funds”; e.g. idividual investments within an IRA do not matter; conversely, “accounts” do matter. An account implies a separate IRA account which was either included or excluded in the original plan design. Assets and SEPP withdrawals within the accounts originally included in the plan can freely move between & amongst themselves. Assets & withdrawals can not move between an accountincluded in the plan and an account originally ecluded from the plan.
TheBadger
wjstecker@wispertel.net
2006-01-04 07:21, By: TheBadger, IP: [66.250.23.25]

L2: thinking about changing my IRAs in SEPP universeYes, his intent is not entirely clear, but somewhat alarming is that the subject line “changing IRAs in SEPP universe” is be definition a SEPP buster.
Hopefully, these two IRAs were defined to be the SEPP universe from day 1. If one of them was not, it cannot be part of the SEPP unless a separate SEPP plan is begun that includes it exclusive of any IRA accounts in the first and ongoing plan. As long as the second IRA was part of the original plan and contributed to the beginning balance, it will not matter which share comes from which IRA each year. But you cannot bring different IRA accounts in and out of the same universe, which is why they are referred to as “universe.”
If shifting balances between the two IRAs that are legitimately in the universe, obviously care must be taken not to mistakenly roll over any part of the required SEPP distribution to the other account and notnotice it before year end. This would be a “pitfall.”2006-01-04 22:42, By: Alan S., IP: [24.116.165.157]

L2: thinking about changing my IRAs in SEPP universeLet me try again to describe the scenario.
I have two IRAs, both of which were included in my original SEPP universe.
IRA #1 has the bulk of the money. This investment pays periodic interest. The periodic interest is not able to be re-invested in this financial instrument therefore the interest is put into a cash account within the same IRA. The trustee for this IRA pays 0.8% on cash funds. Because this financial instrument (where the bulk of the money is working) is performing at a much better level than what the IRS rules would allow me to distribute via my SEPP (i.e. the interest rate this investment is paying is much higher than the interest rate used when I set up my SEPP) the cash fund would grow, even after withdrawing my distributions, but it would only earn the 0.8%.
IRA #2, part of my SEPP universe, is used to do trustee-to-trustee transfers from the cash fund of IRA #1, where it earns a much better interest rate. I take no SEPP distributions from this IRA #2.
This structure has been in place untouched for 2 1/2 years and all is well and my original plan was to leave it as is until the end of my SEPP in 2 1/2 years and I reach age 60 3/4.
But now I am finding that the financial instrument in IRA #2 is outperforming the instrument in IRA #1 and I am considering moving the bulk of the money from the IRA #1 to IRA #2, which would also require changing my distributions from one trustee to another.
From what the first two respondents have said and from what I have gleaned from this discussion forum in the past I think my strategy is acceptable within the bounds of 72(t). From a logistics point of view the biggest concern I have is coordinating the change of distributions, but then I have a whole year to get that worked out so the amount is the same as previous years.
Does that help clarify?2006-01-05 01:25, By: Keith, IP: [71.208.232.156]

L2: thinking about changing my IRAs in SEPP universeHello Keith:
Given your 2nd post, you should be fine. You should move $$$ from IRA #1 to IRA #2 via a trustee-to-trustee transfer & the instructions to do soshould be in writing.
TheBadger
wjstecker@wispertel.net
2006-01-05 07:39, By: TheBadger, IP: [66.250.23.25]

L2: thinking about changing my IRAs in SEPP universeKeith:
Thanks for the expanded info about your situation, but knowing the type of investment would also be helpful. From your description I suspect that you might be using REIT’s or LP’s that don’t allow reinvesting the distributions. Also, if this assumption is correct, I think your rate of return is more like 8% and not 8/10% as you have listed.
Here’s another idea how you might better manage this situation and only use one custodian, assuming I’m correct. If you are using REIT’s and/or LP’s and they are held “direct” with the issuing company, then consider using a brokerage platform IRA that can hold this type investment. The fees get a little higher but you gain some advantages.
First of all, you can put all of your SEPP Universe assets into one IRA account, thus eliminating the need for regular, trustee-to-trustee transfers of the excess income generated.
Secondly, by having all assets in one brokerage account IRA, any income generated goes into one cash account. SEPP distributions will then come from this one IRA account, and you will have excess funds to invest in other investments. None of these actions will affect the operation of your SEPP and most importantly, NO BUST!
REIT’s and LP’s are illiquid investments with restrictions as to how much you can invest into this type of asset. If you can increase your amount of liquid investments with the excess income generated, then I believe it will be to your benefit. Of course if you are not using REIT’s or LP’s, then my idea for using the one borkerage account for all IRA / SEPP Universe assets becomes easier and less expensive.
Hope this helps.
Jim2006-01-05 08:53, By: Jim, IP: [70.184.1.35]

L2: thinking about changing my IRAs in SEPP universea related question-if Keith had originally set up just ONE IRA and had been taking 72t from that IRA for, say, 2 years, and for some reason needed/wanted to set up a SECOND IRA and transfer (trustee to trustee) part of the assets from IRA #1 to IRA #2, could he do this and now have his 72t universe include BOTH IRA’s; or would this bust his 72t. I know he can start with 2 IRA’s but can he change his universe to 2 IRA’s after the 72t has started from one IRA?2006-01-05 09:42, By: john, IP: [24.182.94.66]

L2: thinking about changing my IRAs in SEPP universeJohn – short answer, NO. Once the univers is established, no additions or exchanges allowed.2006-01-05 09:45, By: Gfw, IP: [172.16.7.101]

L2: thinking about changing my IRAs in SEPP universeNow I need to ask one implementation question relative to the plan I am considering.
If I end up moving all my funds from IRA #1 to IRA #2 could I close IRA #1 without creating any issues with the IRS?2006-01-05 09:53, By: Keith, IP: [71.208.232.156]

L2: thinking about changing my IRAs in SEPP universeI guess I interpreted John’s question differently; thus resulting in a different answer; e.g. YES.
Think of this way. You have two kiddie pools, each with a variety (1 or more than 1) yellow duckies in each pool. Pool #1 is the SEPP universe; pool #2 is the non-SEPP universe of deferred accounts. Each yellow duckie is an account.
Money’s can never, ever jump or move from pool to pool; that would cause a SEPP plan bust.
Conversely, any intra-pool events are fine; e.g. yellow duckie in pool #1 has a new baby yellow duckie; e.g. a new IRA within the pool — that’s fine. Further, the other duckies in pool #1 can feed the new baby duckie by transferring money to it.
As long as the contents of the pool (#1 in this case) remain mutually exclusive from pool #2, then any and all typcial transactions are permissible.
TheBadger
wjstecker@wispertel.net
Obviously having a yellow duckie moment
2006-01-05 09:59, By: TheBadger, IP: [66.250.23.25]

L2: thinking about changing my IRAs in SEPP universeGordon:
Maybe I’m missing something, but I think John’s scenario of splitting one IRA / SEPP universe into two IRA’s as part of the same SEPP universe is OK. What would be wrong with having 10 mutual funds in one IRA/SEPP account, then transferring 5 of the funds to another custodian and now havinga second IRA with a new account number but still be part of the same SEPP universe?
Jim2006-01-05 10:00, By: Jim, IP: [70.184.1.35]

L2: thinking about changing my IRAs in SEPP universeBill:
In the event that you have a copyright on the two pools / yellow duckie example, I want a free, unlimited license to use that examplewith my clients and prospects.
Great way to start the New Year!
Jim2006-01-05 10:06, By: Jim, IP: [70.184.1.35]

L2: thinking about changing my IRAs in SEPP universeQUESTION – if Keith had originally set up just ONE IRA and had been taking 72t from that IRA for, say, 2 years, and for some reason needed/wanted to set up a SECOND IRA and transfer (trustee to trustee) part of the assets from IRA #1 to IRA #2, could he do this and now have his 72t universe include BOTH IRA’s;
From the way that I read the question, there was only one IRA at the start and the second IRA was added later – if this is the case, transfers may not occur between the two IRAs. Oram I missing something?2006-01-05 10:19, By: Gfw, IP: [172.16.1.75]

L2: thinking about changing my IRAs in SEPP universeGordon:
Bill’s comment about one duckie having a baby seems to clear this issue for me.
Conversely, any intra-pool events are fine; e.g. yellow duckie in pool #1 has a new baby yellow duckie; e.g. a new IRA within the pool — that’s fine.
Jim2006-01-05 10:24, By: Jim, IP: [70.184.1.35]

L2: thinking about changing my IRAs in SEPP universeGfw notes in an earlier reply:
QUESTION – if Keith had originally set up just ONE IRA and had been taking 72t from that IRA for, say, 2 years, and for some reason needed/wanted to set up a SECOND IRA and transfer (trustee to trustee) part of the assets from IRA #1 to IRA #2, could he do this and now have his 72t universe include BOTH IRA’s;
From the way that I read the question, there was only one IRA at the start and the second IRA was added later – if this is the case, transfers may not occur between the two IRAs. Or am I missing something?
In my clarification message I stated:
I have two IRAs, both of which were included in my original SEPP universe.
Which means both IRAs were in existence when my SEPP started. Perhaps Gfw was responding to ‘John’ who jumped into the discussion and did ask about opening a second IRA later.2006-01-05 22:17, By: Keith, IP: [69.15.132.9]

L2: thinking about changing my IRAs in SEPP universeIn an earlier reply Jim notes:
Thanks for the expanded info about your situation, but knowing the type ofinvestment would also be helpful. From your description I suspect that you might be using REIT’s or LP’s that don’t allow reinvesting the distributions. Also, if this assumption is correct, I think your rate of return is more like 8% and not 8/10% as you have listed.
I am not using REITs or LPs and yes the cash fund that my trustee provides only pays 0.8% interest on funds on deposit. Which is why I don’t want to leave them there.
Here’s another idea how you might better manage this situation and only use one custodian, assuming I’m correct.
Unfortunately the two trustees I use do not handle the same instruments. I wish life were simpler also but it doesn’t work out that way very often.2006-01-05 22:23, By: Keith, IP: [69.15.132.9]

L2: thinking about changing my IRAs in SEPP universeTo attempt a wrap up:
1) Keith should be OK per his clarification providing the IRS can get some documentation that IRA #2 was originally part of the universe if they decide to inquire. This might rest of the intial calc including both of the FMVs.
2) John also appears to be OK as long as his second IRA was initially created by partitioning theoriginal SEPP IRA, and did not exist except to receive the partitioned portion.2006-01-05 23:44, By: Alan S., IP: [24.116.165.157]

L2: thinking about changing my IRAs in SEPP universeKeith:
Thanks for the investment input that you are not using REIT’s or LP’s. However, now I’m really curious. I sense that you don’t want to identify any specific company that you are investing with and that’s fine because it really doesn’t matter. But I would like to know what type of investments you have. I still think you may be better served by using a brokerage-platform IRA and transferring all assets into the one account. That way I think you can better manage your situation as I posted earlier. One caveat; if you are using annuities then don’t try the brokerage platform idea.You can’t actually transfer an annuity “into” the account unless the account makes the original purchase.
Thanks for your input.
Jim2006-01-06 08:35, By: Jim, IP: [70.184.1.35]