L1: total ignoranceI am terribly sorry to be asking questions that I should already know about but…I am retiring in mid-January with a total roll-overable amount of about $350k. I am 57 years old (for calculation purposes) and am looking for an income stream of $1000/mo. How do you figure the amount in an IRA that will fund in such a manner as to provide the income stream I desire? Does the reverse calculator provided on this site figure what I’m after? Also, what exactly is SEPP?2008-12-08 17:23, By: Buzz, IP: [22.214.171.124]
L2: total ignoranceThe reverse calculator is what you are looking for. However, remember that if you start a SEPP [Substantially Equal Periodic Payment] plan you will be locked in for 5 years from the date of the first payment. To have $1,000/month, merely search for an annual payment of $12,000.Take the balance and move it to a new IRA account before you start the SEPP. Keep good documentation as to which IRA is used in the SEPP and which is not. Also note, that the interest rate below assumes a plan started in December.
I removed the calculator results that appeared here. Gfw
2008-12-08 17:38, By: Gfw, IP: [126.96.36.199]
L2: total ignoranceThanks for your swift reply. what effect does the beneficiary age have on the calculations? What is the generic rate of return based on? thanks again, what a great resource this is!2008-12-08 17:56, By: Buzz, IP: [188.8.131.52]
L2: total ignoranceThe beneficiary age has no effect at all if you continue to select “No” for joint calculations. If you change it to “Yes” then the beneficiary’s age will be included in a joint calculation that will lower the dollar amount you can generate vrs. just using your own single life expectancy.The general advice is to leave the joint calculation out so that you can receive the higher dollar amount per dollar of opening balance. If you do not need that higher amount, then partition your IRA as gfw indicated into one holding the amount the calculator indicates and the other IRA will be outside the SEPP and available for emergency needs. Of course, the one outside the SEPP will be subject to penalty if an emergency need does not carry it’s own exception to the penalty (eg certain medical or higher education expenses).SEPP = Substantially equal periodic paymentsAlso referred to in some circles as a SOSEPP = Series of Substantially equal periodic payments. Also often referred to more generically as a 72t plan, but Section 72t contains much more than just the SEPP provisions.2008-12-08 19:25, By: Alan S., IP: [184.108.40.206]
L2: total ignoranceWhen you use the terminology “roll-overable”, warning bells ring. If you mean that you have a 401-K, and are thinking about rolling it over to an IRA in order to set up a SEPP 72-T, STOP !!!!!There is a special provision in Section 72 of the IRS code which permits you to avoid the 10% penalty for “early distributions” ( i.e. before 59 1/2) (which relate to IRAs) by taking distributions from a 401-K, or any other employer sponsored retirement plan once you reach the year in which you will become 55 or are older, and “SEPARATE FROM SERVICE” from that employer, so long as the employer’s plan permits such distributions.In addition, if there is “EMPLOYER STOCK” in your 401-K or other employer plan, STOP !!! Check with your HR or payroll department for the “COST BASIS” of those shares. If there has been significant appreciation of the value of those shares, then read up on THE NUA ( NET UNREALIZED APPRECIATION) PROVISION OF THE TAX CODE ( and get J.K. Lasser’s YOUR INCOME TAX). This could save you a fortune in taxes if done properly. ( See other postings on this list serve which have discussed this in detail many times.)2008-12-08 21:37, By: dlzallestaxes, IP: [220.127.116.11]
L2: total ignorancedlzallestaxes-I think both my company 401k AND my lump-sum pension distribution qualify, as you indicated. But what does this mean to me when attempting to set up a SEPP 72t? My financial advisor makes it sound as though the amount of SEPP will be based on my TOTAL IRA amount (including both my 401k and my pension lump). I was under the impression you could set up a separate IRA that would be the basis for calculating a SEPP. Rather than getting clearer, the water insists on becoming murkier!2008-12-09 06:10, By: Buzz, IP: [18.104.22.168]
L2: total ignoranceIf you funds are still with your employer, there may be no need to set up a SEPP as distributions from employer plans can be taken penalty free after seperation from service at age 55.If you have already transferred you funds to an IRA, your advisor probably did you NO favors and you may want to consider a new advisor unless he/she explored distributions from your current plan.2008-12-09 08:08, By: Gfw, IP: [22.214.171.124]
L2: total ignoranceAnother case of falling hook, line and sinker for the Shark. Why didn’t you do your personal due dilligence? What specific distribution information was given to you by your employer? Many 401k plans allow you to retire and keep your account with the plan. If your plan does, all you needed to do was retire and instruct the Plan Administrator to electronically transfer, to your checking account on the first of the month $1000.00. THIS IS NOT A COMPLEX THING. YOU MADE It COMPLEX BY NOT DOING YOUR SIMPLE HOMEWORK and THEN ADDED INSULT TO INJURY BY TRUSTING THE SALES SHARK. I hope you have not completed the rollover transaction at this time. Please clarify.HOW WAS YOUR “ADVISOR” COMPENSATED? DID YOU INQUIRE PRIOR TO SIGNING? DID HE/SHE MAKE A COMMISSION BY PUTTING YOU IN A COMMISSIONED BASED PRODUCT?WAS THIS THE DRIVING FORCE FOR HIM/HER “ADVISING” YOU TOEFFECTUATE THE ROLLOVER TRANSACTION. PRIOR TO SIGNING DID YOU GET HIS/HER PROPOSAL IN WRITING? THIS STUFF MAKES MY BLOOD BOIL!You should only do a sepp if you are dissatisfied with your Plan’s investment menu. Again the “SEPP” rules do not apply toyou if you retire and leave your accounts with the Plan. See if you can rollover your lump-sum pension payment to your 401(k) account—less paper work as one gets older!Peace and Hope,Joel L. FrankPension ColumnistThe Chief-Civil Service Leader277 BroadwayNYC 100072008-12-09 08:30, By: Joel, IP: [126.96.36.199]
L2: total ignoranceBefore we all get more upset for you, and you get more upset, please let us know if you have in fact already roled over your 401-k or Pension Plan already to an IRA. If so, you’ve probably screwed yourself into significantly more taxes over the years, If you are only considering it, then fortunately you have come to the right place to start to get an understanding of the alternative issues.Your broker/advisor has a vested interest in getting you to roll over everything into an IRA that he can make commissions on the investments he makes for you. If you have not rolled anything over, RUN, don’t walk, away from him, and to a FEE ONLY tax and/or financial advisor who is knowledgeable in all of the topics that we have discussed in response to your posting. One such person is listed on this website as a “site sponsor” or under “professional help”. Although I am a CPA and well versed in this area, 99% of CPAs, EAs, and CFPsare not. So do not expect that just because someone has passed the exams necesssary to get those designations, and has xx years of experience, that they are qualified to advise you properly.2008-12-09 22:13, By: dlzallestaxes, IP: [188.8.131.52]
L2: total ignoranceI have not touched my company money yet. It will likely be the beginning of February ’09 before I get the checks for my lump sum pension and 401k. So, all is not lost. My edward Jones guy also wants to set up an annuity, which I am highly suspicious of. More questions will follow, I’m sure. Thanks!2008-12-10 06:17, By: Buzz, IP: [184.108.40.206]
L2: total ignoranceGood morning Buzz. I prepared a detailed reply yesterday but I failed to copy it before trying to post it, and, as happens sometimes, it went into cyber never-never land. So I’ll try to give you some information that I think will be useful to you.In the first place, don’t be frightened away from a commission-based advisor. Too many people try to portray this as totally evil, which it is not. Whether your advisor is compensated by commission, fee only, fee based, or a combination of any of these methods, think of it as how you are compensating the person who is providing you with good, sound advice. Finding a qualified and competent financial planner is the trick, and after interviewing several you will know that you have found that person. As to 72(t) / SEPP Plans, if your advisor doesn’t know about this site then you have a good idea that you need to either look elsewhere, or help himbecome educated like you are doing. I recommend that you look for a Registered Investment Advisor (RIA) firm, which you can find in the yellow pages. Ed Jones may have an RIA and the guy you are working with may be working under their corporate RIA, and that’s fine. In fact, you have to work with a RIA for a fee compensation arrangement. Don’t be fooled into thinking you should only use a “fee-only” advisor. All of these advisors I know about require a minimum account size in excess of $500,000 and usually greater than $1,000,000. You won’t find a “fee-only” advisor who will accept a single, $5,000 IRAaccount. It’s not economical for either the advisor or client to try working under these circumstances. Since you have $350,000 to work with, expect to see some combination of commission and fee-based arrangement for your situation.Now in your last post you said,”It will likely be the beginning of February ’09 before I get the checks for my lump sum pension and 401k.”This is scarry. It sounds like you have already processed the paperwork to distribute the proceeds DIRECTLY to you instead of doing a “Trustee-to-trustee transfer.” If you receive checks that are payable to you, then 20% will be withheld for taxes and sent to the IRS! Then you have to make up the missing 20% to complete the rollover, and it has to come from other fundslike in savings or your very large checking account, otherwise you will have a premature distribution to pay taxes and penalty on. However, if you have the IRA account already set up with Jones, then the check will be payable to them as custodian and may either be sent directly to them or sent to you to give to Jones. As long as the checks are not payable to you, then you are OK. Hopefully you have not processed the paperwork and you can be sure of this fine but very important point.My final point is this: No investment is inherritently bad … only the improper use of an investment in a particular situation. Now go back to your Jones rep and have himlayout the total financial plan and all of the investments he is planning to use. Let him explain how each investmentwill work within the total investment plan. Until you understand why each investment is being recommended and how it fits into the total investment puzzle, don’t move forward. Your advisor should be able to adequately explain what’s going on and why. If you are using an annuity, be sure it’s a variable and the surrender period is no longer than 4 years and preferably less. There are VA’s with zero surrender charges and zero surrender period.Just like an airplane where the largest part is the fuselage (not the wings), it takes a lot more pieces and parts, and a good pilot, and sometimes a larger crew, to make it work properly. Likewise, your financial plan is composed of many parts and it all comes together for your benefit.Good luck and don’t be afraid to ask questions either here or to your financial advisor.Jim2008-12-10 09:08, By: Jim, IP: [220.127.116.11]
L3: total ignoranceJim—as you most probably expect I disagree with your concept of being an “advisor”. An advisory relationship in the financial services industry means that the advisor is a fiduciary to his client. It cannot get more transparent than that. This is what all investors need and want. The commission salesperson is not the client’s fiduciary. He/she is simply being compensated for distributing a product. Please don’t make it more that it is. A fiduciary relationship means the client’s interests come first or before the advisor’s interests.The broker/dealer’s rep is under no legal requirement to tell the prospective client that the same product he recommends is available for no commission via a no-load firm or that the employer’s 401(k) Plan is just fine and your funds should not be rolled over but remain with the Plan.The b/d rep is free to sell the same product menuand collect a commission. Those b/d and their reps who believe that such a scenario represents an “advisory relationship”are not telling the truth.In the instant case, a fiduciary is more than ready to tell the prospect not to rollover but remain with the Plan. The fiduciary will earn his annual fee by advising the client about his 401(k) investment and help him manage it, in place, for years to come. The commissioned rep, on the other hand,will collect a one timecommission feeof $7000.00 (.02 X $350,000) and put the client in the same kind of investment as is available in the employer’s Plan. Peace and Hope,Joel L. FrankPension ColumnistThe Chief-Civil Service Leader277 BroadwayNYC 100072008-12-10 14:06, By: Joel, IP: [18.104.22.168]
L3: total ignoranceJoel, thank you for your response. When you speak of The Plan, are you referring to the good filks at fidelity who manage all of AT&T’s employees pension and 401k funds? If so, I’m beginning to realize (again, in ignorance) that, once i retire from AT&T, the money COULD just stay where it is, with Fidelity, the only difference being that AT&T no longer has any interest, input or dealings with me or my money at Fidelity?If that is the case, my number one fear for wanting to move my funds out of Fidelity has no validity- That is, thatI thought the two were joined at the hip and future success or failure of myinvestments would rest with AT&T. Not so, eh?So now, armed with this new knowledge, I’m beginning to question why i need to move anything at all. It is true, my paperwork has been set in motion, and my funds are to be distributed to me, but in the name of edward Jones FBO Tim Osburn. This is what Jim was talking about, that I needed to have the money NOT just given to me alone, otherwise the tax penalty would be great?Slowly but surely, this IS becoming clearer to me, but I’m afraid i’ll stuill have questions. thanks to all who have responded.2008-12-10 15:13, By: Buzz, IP: [22.214.171.124]
L3: total ignoranceIf Tim Osburn is the rep at Edward James, you have a problem. If you are Tim Osburn, ok. BUT, if you are going to do this, and there are MANY REASONS NOT TO, why wouldn’t he, and you, want to just do it electronically and avoid all hastles.Again, I would STOP ALL PAPERWORK, and check out all of the consequences, alternatives, and nuances, unless you do not care how much you pay in EXTRA TAXES and fees/commissions.2008-12-10 18:10, By: dlzallestaxes, IP: [126.96.36.199]
L3: total ignoranceBuzz:
I have several clients who retired from BellSouth (BLS) which is now AT&T (T), so I can better address some of your questions and concerns. Since T bought BLS, I don’t know exactly how T runs their pension & 401(k) plans, but I suspect they are pretty much the same. Check with your HR Department for any differences.
When you transfer your T pension plan, you have to complete paperwork, and they will distribute the check directly to the new IRA custodian. However, you simply call Fidelity and give them the name and account number of your new Rollover IRA, and they will cut a check, payable to the custodian, and then they mail the check to you and it’s your responsibility to deliver it to the IRA custodian. Both of these situations constitute a Trustee-to-trustee transferÛ and they do not withhold taxes. This is good.
Fidelity is simply the custodian of the funds for T. T is the plan sponsor.Û The success or failure of one does not impact the success or failure of the other. Fidelity and T are not joined at the hip.Û However, if all of your K-plan consists of T stock, then you have a major investment problem. Do you remember a little company called Enron from a few years back? Need I say more?
Let’s review the Age 55 rule.Û If you retire during the year that you turn age 55 or older, then you may make withdrawals from your pension plan and K-plan without incurring the 10% early withdrawal penalty. This is part of the tax code as administered by the IRS. However, does your retirement plan allow periodic or systematic withdrawals like monthly or something else? The BLS plan did not allow systematic withdrawals which negated the benefit of leaving your funds in their plan and taking money from it when you needed it, typically on a monthly basis. They only allowed a one-time distribution directly to you, less the mandatory 20% tax withholding. This could be for the entire amount or partial in conjunction with a transfer to a Rollover IRA. Check with your HR Department for the current rules.
You have the choice to either use a Financial Advisor or DIY. 72(t) is a tax issue and with enough research of good information, like you will find on this site, you can probably put together a compliant plan and not have any problem with the IRS _ well, no problems that can’t be successfully dealt with. But how well do you feel about putting together a successful investment plan to last the rest of your life? Do you know about and understand all of the investment vehicles that are available to you as part of your total retirement plan? For example, I am confident that I can create a successful retirement plan for someone and help manage all of the elements during the ups and downs of the economy, like we are experiencing these days. But if you asked me how a telephone works, forget it! When I pick up the handset either I will get a dial tone and make a call, or I won’t get a dial tone and then I call maintenance. So you can decide which route you want to take from here on out. Remember, you will probably live more years in retirement than you have spent working. The choice is yours.
Jim2008-12-11 08:57, By: Jim, IP: [188.8.131.52]
L3: total ignoranceJIM’S COMMENTS WERE EXCELLENT, AND VERY COMPREHENSIVE.I would just add that you should immediately check if there is NUA (” NET UNREALIZED APPRECIATION”) EMPLOYER STOCK ( ATT) in your pension and/or 401-K. If so, IMMEDIATELY get the COST BASIS from HR or Payroll, and meet with a TAX SPECIALIST to determine the extent of tax savings by NOT ROLLING IT OVER TO AN IRA !!!!! There are numerous postings on this website that explain this further, as well as J K Lasser YOUR INCOME TAX.2008-12-11 12:56, By: dlzallestaxes, IP: [184.108.40.206]
L2: total ignoranceAs the last responder implied, STOP ALL PAPERWORK related to a transfer of your 401-K and Pension Plan until you understand the ramifications of whatever you do.Ultimately you will/may need accounts at a broker to make whatever transfers are applicable with each aspect of your current plans. As he said, you will be subject to a 20% federal withholding, and will ahve to make that up with other funds in the 60-day period if the check is made out to you. This is true even if you plan to merely endorse the check to wherever you set up the new account(s).There are many QUALIFIED CPAs and EAs who will advise you on a FEE ONLY basis as far as what your alternatives are, and theTAX consequences. I would use a FINANCIAL ADVISOR only for determining the INVESTMENT of the funds once they are wherever you end up with them. Use professional advisors for their respective areas of expertise. You would be fortunate to find one who is highly qualified in both aspects.You may well find out that there will be no need for a SEPP 72-T because of the 401-K early retirement provisions at 55, and the NUA special tax provisions. Find a tax expert knowledgeable in the last 2 areas before you get involved in aSEPP 72-T paln.2008-12-10 09:39, By: dlzallestaxes, IP: [220.127.116.11]