Using a SEPP to help increase 403(b) contributions
L1: Using a SEPP to help increase 403(b) contributions
First the formalities …
New plan, first distribution 2018
As you can see above, this is my 55th year. I am considering “retiring” next year, at least from my current employment (actually, I am going to lose the job involuntarily, but that is likely inconsequential for this discussion), I have a 403(b) there, which I am funding as strongly as I can, but not hitting my 24,000 limit. I am not a high income earner, but have invested sucessfully over the years.
I am thinking of starting a SEPP this year (2018) which will supplement my living expenses enough to fully fund my 403(b) this year and next, effectively “laundering” my IRA funds into the 403(b). When I retire next year, I would be free to draw from the 403(b) (the 55 rule), which is the whole reason I think this will be worthwhile.
I am disciplined enough to carry through on this, so I am not afraid of the penalties from breaking it. I also expect to do some part-time consulting (self-employed), to supplement the SEPP funds for living expenses, and would have access to the 403(b) for additional funds if needed.
I have both Roth and Traditional IRA accounts, if that makes a difference. The Roths have been held for more than 5 years.
Thanks for the help!
2018-09-24 05:13, By: Greg, IP: [184.108.40.206]
L2: Using a SEPP to help increase 403(b) contributions
I failed to say in my first post that I have very little in contributions in my Roth IRA, as I used it to buy a house a few years ago, and have not contributed much more to the Roth since. But the account is still adequately funded to do the SEPP from it if that was preferable, that is why I mentioned it.
2018-09-24 05:20, By: Greg, IP: [220.127.116.11]
L3: Using a SEPP to help increase 403(b) contributions
I think that there are several aspects to consider.
First, your tax bracket for 2018, which is affected by your marital status. If you are single, then the 12% tax braket is up to $ 38,700 of taxable income, which is after the $ 12,000 standard dedcuction, which means up to $ 50,700 of Gross Income. If you are married, then it is up to $77,400 of taxable income, which is after the $ 24,000 standard deduction, which means up to $ 101,400.
Second, your tax bracket in 2019 will probably not make sense for a 403-B deduction, unless you will be receiving a severance package.
Third, ROTH IRAs are usually best to leave alone so that it can accumulate tax-free income and growth for a long time, especially at your age, and even more if you have children (and grandchildren) who will benefit significantly if you let it grow.
Fourth, if you are going to use the 403-B 55-rule, you would not be using the SEPP 72-T plan approach because that involves IRA accounts. It would not make sense to convert a 403-B account into an IRA account.
Fifth, you have to make sure that your 403-B does actually allow partial periodic withdrawals, at least until you are 59 1/2. Check this with the plan administrator.
Sixth, a minor point, the 403-B/401-K contribution limits are $ 24,500 not $ 24,000.
2018-09-24 14:51, By: dlzallestaxes, IP: [18.104.22.168]
L4: Using a SEPP to help increase 403(b) contributions
Thanks for the well-considered reply. I will look it over the evening in detail. Quick response though.
Married and easily in the 12% bracket.
When I spoke of the 55 rule, I was talking of the 403b. When I spoke of the 72t (SEPP), I was speaking of the IRA.
My question was basically “Since I cannot fully fund my 403b from cash flow (income) due to living expenses, should I start a SEPP from the IRA to help me in that?” The value being that I have effectively shifted some of my IRA to the 403b, with it’s improved flexibility.
2018-09-24 18:53, By: Greg, IP: [22.214.171.124]
L5: Using a SEPP to help increase 403(b) contributions
If you are well covered by the 12% tax bracket, then it would probably be advisable to NOT fund your 403-B while in the 12% tax bracket. At some time during your retirement, you will probably have income from Social Security Benefits for you and your wife, as well as Required Minimum Distributions. In addition, you may sell your home, and invest the proceeds. So, you might be in the 22% tax bracket at that time. Ultimately, when either you or your wife die, the survivor will almost definitely be in the 22% tax bracket.
I do not understand how any 403-B (or 401-K) could ever have more flexibility than an IRA. All employer plans that I am aware of have a limited number of available investments, while IRAs have an unlimited number of investments across all typesof investments.
2018-09-24 19:18, By: dlzallestaxes, IP: [126.96.36.199]
L6: Using a SEPP to help increase 403(b) contributions
What you are saying makes sense, thanks.
The 403b is more flexible for withdrawal. I can use the 55 rule and withdraw to my heart’s content before I am 59 1/2. Or not. Not so easy with an IRA.
2018-09-24 19:30, By: Greg, IP: [188.8.131.52]
L7: Using a SEPP to help increase 403(b) contributions
You apparently do not understand the way that the IRS regulations apply to these two rules. Normally, IRA or 401-k/403-B distributions before 59 1/2 are subject to a 10% penalty, in addition to the regular income tax.
The 55-rule allows distributions from 403-B/401-K plans starting in the year of “separation from service” if you are, or will become, 55 before 12/31 of that year. It is not a matter of flexibility of the distributions. IRAs are completely under your control as far as timing. If you have a SEPP 72-T, you can take distributions at whatever frequency so long as the ANNUAL amount is the same each year, except for the option of taking a smaller prorata distribution the first (and last) year. Many employer plans do not even allow former employees to remain members of the plan. If yours does allow it, and will allow you to take distributions at your request, then you are lucky to have such a plan.
If you are in the 12% tax bracket, I would be looking to take distributions out at 12%, not putting it in to get only a 12% deduction. Remember that ALL distributions from retirement plans are taxed, so that the Interest/Dividend Income, Capital Gains Distributions, Principal Invested, and Gains within a plan are all taxed fully when taken out. BUT, if you take distributions at 12%, and then invest the money in a “taxable account, all QUALIFIED DIVIDENDS, CAPITAL GAIN DIVIDENDS, and LONG-TERM CAPITAL GAINS FROM SALES OF INVESTMENTS are taxed at ZERO !!!!
This is called “PLANNING DURING RETIREMENT” !!! Contact a financial advisor/planner or tax professional for an in depth analysis of your situation.
2018-09-24 20:01, By: dlzallestaxes, IP: [184.108.40.206]
L8: Using a SEPP to help increase 403(b) contributions
Thank you for the advice, greatly appreciated.
Actually, I do understand the 55 rule – as I stated in the first post, I will be 55 when the separation takes place. So I can at that time freely (without penalty) draw from that 403b account. Which I cannot do with the same fredom from the IRA. That is the whole purpose of this question.
But, your very thoughtful and thorough answers have convinced me that I probably won’t mess with SEPP unless I have to.
2018-09-24 22:00, By: Greg, IP: [220.127.116.11]
L9: Using a SEPP to help increase 403(b) contributions
If I am interpreting your original post correctly, you were thinking about starting an IRA SEPP to subsidize your 403b contributions, since the 403b balance may not be large enough to generate the pre 59.5 distributions you may need, even if the 403b provides flexible distribution options.
If so, this is a unique approach. You would be substituting an IRA SEPP for which the distribution amount is not critical to pad your 403b balance from which you would hopefully be able to take out any amount you need.
Most desirable would be avoiding the SEPP altogether, but if that is not possible your plan is better than the typical one we recommend which is to have a modest IRA balance in a separate IRA outside the SEPP. That would provide insurance against busting the SEPP, although you would owe the penalty on those non SEPP IRA distributions. In this case, the safety value would be the 403b from which the distributions would be penalty free, and therefore this plan would be better than the additional IRA safety valve.
This could be effective, but only if the account balances work with this plan.
2018-09-25 02:15, By: Alan S, IP: [18.104.22.168]
L10: Using a SEPP to help increase 403(b) contributions
Yes, you follow my thoughts. Thank you for the input.
I cannot fully fund my 403b without the SEPP. dlzallestaxes suggested that I should not be funding my 403b at my current tax bracket, but I will continue to fund it until retirement to the best of my ability, with or without the SEPP.
For safety, I would have both the 403b and additional IRAs that I could pull from. I would be doing the SEPP from less than half of my total IRA value, and the rest is in separate accounts already.
In addition, I am thinking there is a pretty good chance that I would have to tap my IRA anyway before 59 1/2. So, since it likely would happen anyway, might as well get it going and get some of the 5 years under my belt.
I am still toying with it.
2018-09-25 02:52, By: Greg, IP: [22.214.171.124]