Withdrawal options for other reasons during SEPP
L1: Withdrawal options for other reasons during SEPPI am considering starting a new SEPP. Particulars are: DOB 11/1962, age 50, single female, traditional IRA current value just under $600,000. Because I haven’t had income in 2012, I am considering paying the penalty on a distribution this calendar year to pay off some debt and starting the SEPP early in 2013. I expect to have taxable income of $15-20k annually in the near term and want to supplement with the SEPP.
Does the account value used in calculating the SEPP have to be an EOY, Dec 31, value? (One reason I was considering taking the penalty hit this year… So I can use the current, higher, value in SEPP calculations rather than starting this year and having to use EOY 2011.)
If, at a later date, I wanted to take an additionaldistribution to pay qualified higher education expenses (daughter in college) could I do that without invalidating the SEPP? Or, am I reading that I would need tosplit my funds intotwo accounts, one for the SEPP and one that could be used for other qualifying withdrawals or emergency withdrawals subject to the 10% penalty?2012-11-13 16:11, By: TLA, IP: [22.214.171.124]
L2: Withdrawal options for other reasons during SEPPThe balance used for calculations has to be reasonable – at a minimum it it would be the balance after you make any withdrawals.
If you want to make any educational withdrawals or for other expenses like emergencies, consider segregating those amounts from any amount that you plan to use for the SEPP plan. Any amount segregated into a new account could not be used in the SEPP calculations.2012-11-13 16:22, By: Gfw, IP: [126.96.36.199]
L3: Withdrawal options for other reasons during SEPPYou can take an IRA distribution for qualified higher education expenses and there will be no penalty to the extent you paid for such expenses. However, there are timing requirements, ie what period are the expenses for and when did you take the distribution? You cannot include expenses paid with financial aid either. See IRS Pub 590, p 50 which you can pull up on this site for additional details.
Therefore, you could take a penalty free distribution up to the educational expenses. The balance you would use for a SEPP would have to be on a date after you took the current distribution. If you partition your IRA into two accounts with the intent to use one for the SEPP and the other for specific needs, you could pay future higher education expenses from the other IRA without penalty. Best to partition the accounts by direct transfer rather than a rollover.
Obviously, since we do not know all the details of your situation, certain assumptions were made in this post and there may be other factors here. If any questions, please post.
2012-11-13 17:46, By: Alan S, IP: [188.8.131.52]
L4: Withdrawal options for other reasons during SEPP2012-2013 Higher Education expenses are covered by Scholarships and Financial Aid, but I want to leave options open for 2013/14, 2014/15 in case Financial Aid doesn’t cover as much and I know how to determine what are qualifying expenses.
I just needed to verify whether those qualifying withdrawals (if needed) could be taken from the SEPP account without busting it or if they still had to be from a segregated account (like non-qualifying, non-exceptionwithdrawals would).
Thanks for your responses2012-11-13 17:58, By: TLA, IP: [184.108.40.206]
L5: Withdrawal options for other reasons during SEPPYou can take them, but at your own risk. While there have been limited PLRs that have approved that type of transaction, you can’t rely on a PLR issued to another taxpayer if the transaction is challenged.
You would be much better off segregating the funds up front and not inviting additional scrunity.2012-11-13 19:47, By: Gfw, IP: [220.127.116.11]
L5: Withdrawal options for other reasons during SEPPOptimally you will set up two separate IRA’s:The firstto fund your SEPP distributions and the second to fund educational withdrawals (non-penalty) and other emergency situations (penalty.) I’ll let Alan or GFW address the current status of making educational withdrawals from a SEPP Plan IRA account since they aremore up on the current environment with the IRS. But basically my understanding is the answer to your question is about as clear as mud …. or not definitive.
Now for the planning aspect of your question. Using the “Reverse Calculator” on this site, to fund a $15,000 / year withdrawal under current interest assumptions, you would need an IRA with a balance of $424,233.76; for $20,000 / year withdrawal you would need $565,645.01. So in either scenario, since you have $600,000 in one IRA, you can easily split it into two separate accounts … which means each IRA has a unique account number … and start the SEPP Planfor your necessary annual distribution.
I hope this helps.
Jim F2012-11-13 19:58, By: Jim F, IP: [18.104.22.168]
L6: Withdrawal options for other reasons during SEPPI agree with all of the above suggestions.
However, I would clarify further that after you segregate your present IRA into 2 IRA’s, the one that is not used as a SEPP 72-T you can allow to be just a regular traditional IRA if and until you might need it for an educational distribution, which would not be subject to the 10% penalty. After your child has graduated, the balance in that account can be allowed to continue to grow, or can be used as a 2nd SEPP 72-T to supplement the fixed annual distributions from the 1st SEPP 72-T, or split into a 3rd IRA if you wanted to keep part of it as an emergency fund.2012-11-14 04:37, By: dlzallestaxes, IP: [22.214.171.124]