SEPP/72T distribution questions
If an IRA owner (under 59 1/2) begins withdrawals from an IRA using the SEPP plan, but begins the monthly distributions in May, only 8 months of withdrawals will happen. Does the IRA owner then need to make a withdrawal in December as a lump sum distribution to cover what would have been needed for January – April to reach the full 12 month calculated distribution? If this is not done, what are the consequences?
Thank you for any thoughts!
Bill Nelson
Financial Advisor
Permalink Submitted by mk foss on Fri, 2008-12-12 23:24
No. It’s fine to take 8 payments in the first year. You catch up on the back end and take the extra 4 payments in the final year.
This has been approved in numerous letter rulings.
Permalink Submitted by Alan Spross on Sat, 2008-12-13 00:08
I agree.
However, he could take that extra 4 months worth this month if he wanted some padding to carry into the future years of the SEPP. In the first stub year, taxpayer has the choice of either pro rating the annual distribution by the month (8 payments here), or taking the full annual amount.
IRA owner will not have this flexibility for the next few years, so it is something to consider.
Permalink Submitted by Bill Nelson on Mon, 2008-12-15 14:42
The SEPP began in May 2007 and the IRA owner took 8 months of distributions. In 2008, he continued the monthly withdrawals for the first 4 months and then had the payments stopped with the intent on switching to the RMD method using the 12-31-07 balance. He has not made any withdrawals since and now wishes to withdraw the remaining SEPP amount for 2008 using the RMD method. Is this ok? Would it be safer to make a lump sum withdrawal for the remainder of the 2008 planned SEPP using the original method and then change to the RMD method as of 1-1-09?
Thanks again!
Bill
Permalink Submitted by Alan Spross on Mon, 2008-12-15 18:43
Bill.
OK, with a 2007 start, taking an extra 4 months for 2007 is obviously off the table.
He can switch to the RMD method effective January, 2008 using the 12/31/07 balance, as long as the calculation does not generate a lower amount than he has already taken out, but more likely, he will have to take a distribution in the next two weeks to bring the 2008 amount up to the RMD indicated calculation.
That said, if the 2008 year end balance will be much less than the 2007, can he live with these major reductions until the end of the plan? To determine this, an analysis of his financial needs must be done and also a review of the IRA holdings and their potential volatility. In the next two weeks he must withdraw the amount needed to meet either the RMD calculation OR must withdraw the other 8 months using the current annual figure. Since both options are available, the determining factor should be how much padding he needs as insurance that the RMD method will not produce too little to live on for the remaining term. RMD is more unpredictable on what the annual calculation will generate unless the IRA is invested mostly in CDs or other cash equivalents.
Permalink Submitted by Bill Nelson on Mon, 2008-12-15 21:26
Thank you so much for the help thus far! One final question: if he changes to the RMD method (either this year or next), what dollar amount will need to withdrawn at the end of the SEPP term to satisfy the shortened first year in 2007, when only 8 months of withdrawals were made? 4 months using the original calculation, or 4 months using the December 31 balance at that time?
Permalink Submitted by Alan Spross on Mon, 2008-12-15 21:56
The latter.
But if the month he reaches 59.5 is later than April, 2012, his “modification date” would be based on age 59.5. The one time switch to RMD does not change the original modification date, but all distributions made after the switch would be based on the RMD method.
In the switch itself, he can use any of the three RMD tables in Pub 590. But if he uses the joint and survivor table, the beneficiary age must reflect that of the sole beneficiary on the particular IRA account used for the 72t plan. It is best to stick to either the single life or the uniform table.