Planning Pointers to consider before establishing your SEPP plan.
- Determine your income needs. Before you start planning your SEPP plan, create a budget so that you will know how much income you will need during the period covered by the plan.
- When using the calculators start with Single Life Expectancy Table and the maximum interest rate allowed. If the single life calculations produce a higher payment than you need, consider breaking the IRA into multiple accounts using only one of the accounts to produce the desired SEPP payment. Other accounts can be used for emergencies or for establishing another SEPP at a later date.
- Don’t Round. When you calculate the annual SEPP amount, don’t round the result – use the exact amount to the penny. The SEPP Distribution Calculator on this website calculates to the penny. Many other online calculators do not.
- SEPP Custodial Account. Consider using a brokerage Custodial Account for your SEPP plan that allows you to choose investments from any source that you desire. Reallocating your investments within your custodial account is different from doing a Partial Transfer to a new Custodian. Partial transfers were rejected by the IRS in PLR 200925044 & PLR 200720023.
- Plan your distributions and don’t use the first or last day of the month for a distribution date. A distribution on 12/31 leaves no room for errors and no way to correct an error should it occur. Using a distribution date around the 5th or 6th of the month leaves maximum flexibility.
- SEPP Distribution Amount. Once you have set the assumptions (account balance, age, interest rate, distribution method) you must take the calculated annual distribution, no more and no less. Converting the annual distribution to another frequency (for example change from annual to monthly distributions) and then rounding may result in variance of $.50 from the annual amount which is OK.
- Withdraw SEPP Distribution from a Cash Account. When selling stocks, bonds, ETFs or mutual funds, request for proceeds to be swept into a cash (sweep or Settlement) fund within your retirement account, then make the planned withdrawal from the cash account. By making the withdrawal from your cash account, you will get the exact amount you request, to the penny. You can’t be as exacting when you transfer stock for sale because the stock price changes by the minute.
- SEPP Effective Date. The effective date of your SEPP plan is the date the first distribution is made. It is the effective date that determines the maximum interest rate that may be used in the calculations, as well as calculating when your plan will end.
- Before you actually begin, know when your plan will end. Your SEPP plan end date is also called your First Modification Date, since it is the first time you can make changes to the amount you withdraw each year (increase, decrease, or stop withdraws completely). Calculate your end date using our First Modification Date calculator. The 72tNET.com website currently is the only site that with a First Modification Date calculator.
- Retain all of your documentation for at least seven years after the plan ends. At a minimum, all tax related documentation should be saved for 7 years in case of an IRS audit. With regard to SEPP-related documentation, you should save your initial SEPP calculations, an official statement from a brokerage or other official source with the initial balance used in the calculations, and a statement showing the date and amount of the initial distribution. In addition, you should keep annual statements showing the distribution amounts and timing of all distributions. You may also want to review our sample SEPP Form.
- Your SEPP is your responsibility. Don’t assume that someone else is taking care of your plan. Understand how all calculations were performed and verify their accuracy – including calculations provided by a professional! In the fourth quarter of each year confirm that you are on track to receive the required total annual distribution. Take the last distribution of the year by mid-December to ensure the account is settled well ahead of 12/31. There is no window of time to take make adjustments to distributions to meet the required annual payment after 12/31.
- Mistakes can be costly – Once you begin SEPP distributions, any change in the payment amount, even by accident or mistake by your brokerage firm, is likely subject you to the 10% penalty tax, plus interest, applied retroactively to all previous distributions. One type of change – changing the frequency of payments within the year (from annual to monthly, for example) is a valid change and will not trigger this penalty. Be careful and document well.
- Be conservative in your estimates – The longer the time period that you have to the end of your plan, the more conservative you may want to be.
- Don’t be part of a SEPP horror story – Establish a plan that will take advantage of insights from past PLRs for the highest likelihood of success – yes it is possible, but it must be planned for in advance.
- Consult an advisor – mistakes can be very costly. You may be a very good engineer, computer consultant or teacher – but that doesn’t make you an expert on the internal revenue code, investments and income planning issues.
Have more questions? Please post them in our Discussion Forum.