Under estimating payments
L1: Under estimating paymentsLast year was my first year taking SEPP. When I filled out the Vanguard IRA RMD distribution request form, I put down the correct yearly amount, but under estimated what that translated to per month. I thought the experts at Vanguard knew the yearly amount was the key target, and would make sure I met that goal. However, now that I”ve received my tax form, I am $1000 under what I should have taken out of the account last year. When I called Vanguard, they were quick to point out they sent me just what I asked for each month.
Ok, I made a mistake and they didn”t correct it. What do I do now? I made sure they updated the account so I will receivethe correct amount based on new yearly calculations for this year, Will the IRS penalize me for my shortfall last year? Isn”t there a grace period for stupidity during the first year?2008-02-22 06:49, By: Denise, IP: [184.108.40.206]
L2: Under estimating paymentsHello Denise:
Unfortunately, there are no grace periods for any reason. I think you have two choices:
1. Eat the 10% surtax fro your 2007 distributions and start over effective 1/1/08.
2. Immediately distributethe $1,000 under-distribution; declare it as income in 2007 even though not distributed until 2008 and ALERT your 2007 return. (You will likely need to hire a tax professional in order to do this correctly).
2008-02-22 06:55, By: TheBadger, IP: [220.127.116.11]
L2: Under estimating paymentsIn the first calendar year you can distribute EITHER the ANNUAL DISTRIBUTION AMOUNT, OR a prorata amount based upon the number of months from the first distribution to the end of the year. Give us all of your figures, and maybe someone can help you out. What was your age, IRA balance for the plan, assumed interest rate, annual amount and monthly amount, and first monthly distribution date? Possibly all that has to be done is to alter your interest rate assumption on the documents/calculations that you made. The IRS does not get those from you or Vanguard.
2008-02-22 09:10, By: dlzallestaxes, IP: [18.104.22.168]
L2: Under estimating paymentsBe real careful about changing the assumptions used to build the initial plan – doing so will automatically but the plan. There could also be a few other problems is the plan has been documented at Vanguard or by your advisor.2008-02-22 09:15, By: gfw, IP: [22.214.171.124]
L2: Under estimating paymentsThank you for all the suggestions. When I read the first response, I called Vanguard and arranged fora payment to be sent to me for the shortage from last year. I know I will definitely need professional tax help instead of my usual practice of using TurboTax this year.
To answer the subsequent postings: my SEPP started in March, 07. I was 56 and my 12/31/06 balance was $146,123.21. Using the RMD, my life expectancy factor was 27.9.My yearly withdrawal should have been $5091.40, but they sent me $4000. I”ve requested $1091 and will file it as income in 2007. My new calculations for 2008 are: life expectancy 28.7; balance $149,55.01; total for the year: $5360.25.
2008-02-22 12:22, By: Denise, IP: [126.96.36.199]
L2: Under estimating paymentsI think you have confused the SEPP 72-T calculation with a RMD (“Required Minimum Distribution”) starting at age 59 1/2 for IRAs. Are you sure you set up a valid SEPP 72-T ? If not, then all of the previous comments are not applicable, and you are subjec t to a 10% penalty on all of your distributuins for 2007, and the extra one you just took.
SEPP 72-T calculations include the assumed interest rate. See the calculator with this website. Someone else can verify the calculations.2008-02-22 15:17, By: dlzallestaxes, IP: [188.8.131.52]
L2: Under estimating paymentsI am resisting the urge to panic because I know I have a legitimate SEPP with Vanguard. None of my paperwork has 72t, but I thought 72t just refered to the Internal Revenue code. The documents I have from Vanguard outline three calculation methods for SEPP: RMD, fixed amortization and fixed annuitization. I chose the RMD. My document says I can withdraw money before reaching 591/2 without the 10% penalty, but I will owe federal and state taxes.
I”m not sure what I said in my posting to make you think my SEPP is not legitimate. If I used incorrect terminology, I apologize for the confusion. 2008-02-22 16:57, By: Denise, IP: [184.108.40.206]
L2: Under estimating paymentsDenise – the minimum distribution method is a valid method and only involves dividing the starting balance by the life expectancy factor. I have no checkedyour math, but the concept is OK.
2008-02-22 18:22, By: Gfw, IP: [220.127.116.11]
L2: Under estimating paymentsMy mistake.When you mentioned the Vanguard IRA RMD form, I forgot that was there was amethod that did not use the interest rates. Most of our discussions here revolve around the more sophisticated calculations where people are trying to “get the most bang for their buck” by tying up the least amount in the SEPP 72-T in order to allow them to have some left over for emergency funds.
Sorry if I upset you.2008-02-22 20:50, By: dlzallestaxes, IP: [18.104.22.168]
L2: Under estimating paymentsJust a novice here and I”m in my SEPP”s 2nd year and still learning. I read this post with interest and although I could easily be wrong, there is a big question here.
The original poster responded to a question on details with “my SEPP started in March, 07. I was 56 and …”. Given that, since he was over 55 before the SEPP began, wouldn”t that alone allow him to not even setup a SEPP and just withdraw as he likes and pay his tax bill w/o any penalties?2008-02-23 14:52, By: Larry, IP: [22.214.171.124]
L2: Under estimating paymentsThe age 55 exemption does not apply to an IRA. 2008-02-23 16:02, By: Gfw, IP: [126.96.36.199]
L2: Under estimating paymentsThe 55 and over exception to the 10% penalty only applies to 401-k and employer pension plans, provided you “separated from service” with that employer. It does not apply to IRAs at all.
The important thing, as with all PLANNING, is to do the research, gather all of the facts, consult with experts/specialists, and then develop a PLAN !!!!!
Too amny people come to this forum asking for help after they have done someything wrong, expecting a panacea to rescue them from themselves.
2008-02-23 16:56, By: dlzallestaxes, IP: [188.8.131.52]
L2: Under estimating paymentsAs Isaid, I could be wrong, and I was. Thanks for the straight answer. This site and some of your answers were invaluable to help me with the SEPP and know of lot of the right questions to ask Fidelity and my tax guy.
I missed the 55 rule byonly a few months and was unable to work something out with my employer to get me passed Jan. 1. One of those ugly severrance deals. The SEPP was the most reasonable option after that and is working well for me. Time seems to be going by fast and I”ll be 62 just after my period runs out.
Thanks again for the help and I”ll keep reading to learn more.2008-02-23 18:35, By: Larry, IP: [184.108.40.206]
L2: Under estimating paymentsDenise, Since you started your SEPP in March you can actually reduce your underpayment calculation by taking 10/12 of the full year amount (5091) which amounts to 4,242. In your first year of a SEPP you can elect to take the prorata amount instead of the full year calculation. 2008-02-25 16:16, By: tomagolfing, IP: [220.127.116.11]
L2: Under estimating paymentsWhen you said they sent you $ 4,000, was that an exact figure, or a general amount. If the exact amount, then you busted the plan already n he first year, and will owe $ 400 penalty ( $ 4,000 x 10%). If so, pay the penalty, terminate the plan, and start over correctly for 2008, and calculate using all 3 ways before you start to see which method you should select.
If the excat figure you received was $4,242 or $ 4,243 then you got the right prorata figure, and did not bust the plan, and do not owe any penalty.
2008-02-25 16:56, By: dlzallestaxes, IP: [18.104.22.168]