Why the 1/2 anyway?
L1: Why the 1/2 anyway?For some reason the timing of the 72(t) withdrawls messes me up, especially when they talk about age 59 1/2. Where in the world did that come from? What”s the reason for the 1/2, why isn”t it just your simple age on your birthday? What I”m confused about is if I take annual distributions, do they have to be taken out on the exact same day every year like clockwork? If I start when I”m 54 1/2, then does it end exactly when I”m 59 1/2 (5 years)? What if it was one day earlier or later – is it that exacting? If I start when I”m 54, then I am confused as to what happenswhen I turn 59 1/2. Do I have to take two payments that year or what. Are we talking about exact timings hereor just the entire year that you turn a certain age? Any better clarification would be helpful!2008-04-01 08:20, By: mikex, IP: [184.108.40.206]
L2: Why the 1/2 anyway?Let me address some of your questions in a “streaming fashion” as you asked them. Some of my answers may sound short or strange so don”t be offended … it”s just the way it is.
For some reason the timing of the 72(t) withdrawls messes me up, especially when they talk about age 59 1/2. Where in the world did that come from? What”s the reason for the 1/2, why isn”t it just your simple age on your birthday? Good question that has been asked many times before. The simple answer is, ask your Congressmen who were in power when the 1974 law was passed that created IRA”s. That”s just the way they built it and nobody can figure out their reasoning.
What I”m confused about is if I take annual distributions, do they have to be taken out on the exact same day every year like clockwork?No. The date of your first distribution from your SEPP Plan universe (usually an IRA) is the “start date” for your plan. From that date you have to take 5-years of distributions (in days) AND until you reach your actual age of 59 1/2.
If I start when I”m 54 1/2, then does it end exactly when I”m 59 1/2 (5 years)? What if it was one day earlier or later – is it that exacting? Use the “Last Date Calculator” on this site to determine the first date you can modify your plan after it starts. Yes, the dates are exact and you must run the full 5-years.
If I start when I”m 54, then I am confused as to what happenswhen I turn 59 1/2. Do I have to take two payments that year or what. Are we talking about exact timings hereor just the entire year that you turn a certain age? When you turn 59 1/2, your distributions will be “Normal” and not subject to the 10% penalty. HOWEVER, if you haven”t satisfied the 5-year requirement until after you reach age 59 1/2, say until you reach age 61, then you must continue taking distributions until you satisfy the 5-year requirement. Once you satisfy the 5-year and age 59 1/2 conditions, you may make changes.
Your questions are very common for someone starting out to set up a 72(t) program. My suggestion is for you to begin reading the FAQ”s and previous posts on this site. Your should also buy Bill Stecker”s book, the complete guide to 72(t) which is available for purchase at a very reasonable price through this site. Look for the big, blue button on the home page and other pages throughout this site.
Jim2008-04-01 12:31, By: Jim, IP: [220.127.116.11]
L2: Why the 1/2 anyway?The reason for the 1/2 for 59 1/2 and 70 1/2 is because the Congresspersons who passed it back then were “HALF ASSED”. ( Sorry, but I couldn”t resist.)2008-04-01 13:01, By: dlzallestaxes, IP: [18.104.22.168]
L2: Why the 1/2 anyway?DLZ:
That”s the best &@# post you have made in a long time!
RIGHT ON, BRO!2008-04-01 13:16, By: Jim, IP: [22.214.171.124]
L2: Why the 1/2 anyway?Jim, thanks. Yea the 1/2 deal is really stupid.
OK, so maybe I need to buy the book (and I did a lot of reading here before posting, but being anal-retentive, I didn”t understand the timing well enough.)
It sounds like you have a start date, and you take a withdrawal out every 365 days or less from that date, but they have to be in different calendar years, but not on the same day in each calendar year? Ugh.
My B-day is Jan 19. Now, in the year I turn 59 1/2 (July 19 would be my 59 1/2 date in the year) which will be the longer term (I plan on starting in 2009), I still don”t understand, do I take out a last payment before 59 1/2,or the exact date I turn 59 1/2.In that year after I turn 59 1/2 then can I take out another “normal” distribution in the same year? Iam missing some measure on understanding on the timing, perhaps I”m too dumb of course! If some examples of fictitious people doing these transactions year by year was available showing dates in different scenarios that would be very helpful.
2008-04-01 13:37, By: Mikex, IP: [126.96.36.199]
L2: Why the 1/2 anyway?Let me add my $0.02 to the 1/2 nonsense. Seeing as to how everything done by government is done in committee, and we all pretty much know how they operate, my theory is that half of the committee wanted age 59 and the other half wanted 60. 59.5 became a compromise that all could live with, even though nobody really liked it. Besides… the bar was about to open and they needed to get this business done! 😉
Note that they did exactly the same silly thing concerning when money MUST start coming out of an IRA… at age 70.5. Oh, well. No points for brilliance but perhaps 1/2 a point for consistency! :-/
Ed2008-04-01 15:50, By: Ed_B, IP: [188.8.131.52]
L3: Why the 1/2 anyway?LOL – that makes more sense than anything I”ve read so far!2008-04-01 16:02, By: Mikex, IP: [184.108.40.206]
L3: Why the 1/2 anyway?Hi, Mike:
Glad that I could help make your day. 🙂
2008-04-02 13:22, By: Ed_B, IP: [220.127.116.11]
L2: Why the 1/2 anyway?I feel your pain, Mikex. See my post of March 7. It might help. I have a master”s degree in history, a minor in economics, and I worked on the copy desk of a daily newspaper for 29 years. But I”m still not absolutely sure about the last SEPP payment. Stecker”s book is very good and worth the money. As far as I can tell, it”s the only book ever written on the subject, too. I think the major thing to remember about government regulations is that they were written by drones. So it”s best to follow them like a drone. Too much thinking will only lead one astray. 2008-04-02 02:58, By: Eureka, IP: [18.104.22.168]
L2: Why the 1/2 anyway?
OK, you”re dealing with an engineer here (anal-retentive)
From the calculator –
Start SEPP: 4/1/2009
59 1/2 age: 7/19/2017
So lets say I take annual withdrawals thusley, once each calendar year –
4/1/2009 (Start SEPP)
Is that OK so far? Taking them every calendar year but not on the same day. So far so good?
Now, comes the last one. The rule says I have to take them for 5 years or until I reach age 59 1/2, whichever is longer. Well, I don”t turn mathematically turn 59 1/2 until 7/19/2017, so it seems to me if I took the withdrawal before exactly 7/19/2017, I wouldn”t satisfy the rule, because I wouldn”t have taken the withdrawals until I was 59 1/2 on the calendar. If I take it on exactly 7/19/2017 then I would be 59 1/2, and If I took it after 7/19/2017, I would be older than 59 1/2 (I assume that is fine though). So is it correct that I must wait until 7/19/2017 or AFTER to take the last payment, or is the IRS really just talking about the YEAR I turn 59 1/2, not the actual day, so the actual payment can occur anytime in the year I turn 59 1/2?
Or is another ooption to just do yet another year past 59 1/2 till you are 60 1/2 just to make sure you “padded” the withdrawals with a safety margin?
By the way I like you guys, it”s nice to talk to others that have the same issues. I want to pull the plug on my job next year since I got my house and cars paid off, and have no other rersponsibilities (well I do have two cats, but they don”t need to go to college).2008-04-02 04:58, By: Mikex, IP: [22.214.171.124]
L2: Why the 1/2 anyway?mikex,
Also see a relatedposting by WALT on 3/6/08, and pay special attention to the final post he made withinthat thread, where he quotes the IRS reply to the same question. Many people seem to confuse taking at least five years of payments with completing the SEPP plan, when sometimes that is not enough. If after taking 5 years of payments, you are still not 59 1/2, then forget about the 5 yr rule, and focus on theSubstantially Equal Periodic Payments (SEPP)taken until 59 1/2 part of the rule, since it is the longer of the two rules that would apply for you, as I think the post I referenced above will state.If you are taking annual payments, in the last calendar year, you could have your custodian switch it to monthly payments, and only take them until the month you turn 59 1/2. If you will need the money from your IRA anyway, just take the full year payment in that 59 1/2 year, since the tax effect is the same if taken before or after crossing the 59 1/2 boundary as longas you didn”t “bust” your SEPP plan.KEN2008-04-02 06:06, By: Ken, IP: [126.96.36.199]
L2: Why the 1/2 anyway?Mike:
I have found that most engineers try to slice & dice too finely and make things more difficult than they really are. So I used your data, ran the “SEPP Last Payment Date” under the “Calculators” section and got the following:
BD: 1/19/1958 SEPP Start Date: 4/1/2009 5-yr period ends: 3/31/2014
Age 59.5 date: 07/19/2017 First date to modify your SEPP Plan: 7/20/2017 (the day after you turn 59.5)
So you calculate your annual SEPP Plan Distributions and take the same amount (assuming you do not have “recalculation” as part of your plan)each year,whenever you wish DURING each year of the plan. For you that”s 4/1/2009 thru 7/20/2014.
Bill Stecker does a better job of explaining what you do in the last year, so I”ll try a “Cliff”s Notes” version. Since you have taken 5-years of distributions before your age 59.5, in the last year you can take the total annual amount or less than the annual amount or none. Bill”s book explains this in more detail.
Hope this helps.
Jim2008-04-02 07:20, By: Jim, IP: [188.8.131.52]
L2: Why the 1/2 anyway?OK, I think I understand what to do in the last year, but I haven”t heard it stated in so many words yet.
In the last year – 2017 – the year I turn 59 1/2, I can take the entire payment (yes I am going to be taking the exact same payment every year) anytime in that year, because the payment covers the entire year I turn 59 1/2. I could take it on Jan 1, 2017; Jul 19, 2017; or Dec 1, 2017. Any of those dates is OK because it is in the year I turn 59 1/2.
If this is correct, I am satisfied I understand it now.
If it isn”t, then I”ll buy the book 🙂
Thanks!2008-04-02 07:38, By: Mikex, IP: [184.108.40.206]
L2: Why the 1/2 anyway?Yep, I think you”ve got it now.
One word of caution about dates for taking distributions. Avoid distributions late in December or early in January if you use the monthly method. And this will carry over for when you reachage 70.5 for Required Minimum Distributions (RMD). When you delay distributions until late in December, sometimes things happen and the December distribution gets delayed until January of the next year. Likewise the early January distribution may get advanced into the previous December. Consequently you have distributions occurring in the wrong year, and this is a real bucket of worms to clean up.
My final recommendation is that you buyBill”s book anyway. Since you”re an engineer, you”ll love digestingthe technical stuff.Bill providescharts that are hard to find even on the IRS web site. There is more informationtoanswer questions you haven”t thought of yet and will inevitably come up. But most improtantly, Bill is a starving CPA who has recently moved from the beauty of the State of Colorado toanother state. (I think he”s going through some psychological counseling to determine why he made this move. The boy needs the money for his therapy!)
Jim2008-04-02 08:22, By: Jim, IP: [220.127.116.11]
L2: Why the 1/2 anyway?Starving CPA. That”s rich. Do you recall, Jim, exactly where in the book Stecker talks about the last year?2008-04-02 12:27, By: Eureka, IP: [18.104.22.168]
L2: Why the 1/2 anyway?Hi Eureka:
Sorry but I don”t have Bill”s book memorized, but I use it as a great resource. However, if you will read Bill”s new post just above this one, Subject: “What to do in the last year?” then you will have his answer.
Jim2008-04-03 09:14, By: Jim, IP: [22.214.171.124]