Need immediate help on 72t / SEPP
50 year old client just began SEPP on $350k IRA. Custodian indicated that (start date of September 2010) the amount distributed for the remaining 4 months of 2010 would be the annual amount divided by 4. (I know you CAN just take the prorated amount but client wanted full year). Now that the first distribution has been made of just a prorated amount — what can be done to get the remainder of the full annual amount while complying with SEPP rules? (Client will end up with just 1/3 of the annual amount.
If client takes a one time distribution that, along with the monthly distributions, equals the exact amortization annual amount — will this be allowed to be claimed as his SEPP annual with no penalty?
What is the difference on the 1099, if any?
I greatly appreciate any direction or answers.
Sincerely, PB
Permalink Submitted by Alan Spross on Fri, 2010-09-24 19:35
This is not a problem. The plan can be initiated with an opening Sept. distribution of any amount, even a dollar. That distribution date enables use of the July or August interest rate. The first year can then be brought up to either a pro rated amount of 1/3 the annual OR the full annual at any time and in any distribution format as long as the exact full annual or 1/3 annual amount has been distributed by 12/31/2010.
The term “substantially equal” only applies to the annual total distribution, NOT to the distribution pattern, which can be changed at will within a year or from year to year.
Some custodians seem to think that the first year MUST either be pro rated or cannot be pro rated, and do not understand the choice available. If a client is not sure and needs more time to decide, he could just distribute the pro rated amount and then in mid December determine whether to distribute the balance of a full annual amount. It may be wise to take the full annual amount and keep it in reserve in case living expenses increase in the later years of the plan and the annual amount is lacking. That might save the plan, since a 9 year window is a long time to make an accurate estimate of expenses.
Permalink Submitted by Bruce Steiner on Sun, 2010-09-26 02:22
While I’ve written on how to avoid the penalty on early withdrawals (see my article in the January 2000 issue of Estate Planning, http://www.kkwc.com/docs/AR20041012155030.pdf, which is somewhat out of date since it was written before Rev. Rul. 2002-62), the real problem in most cases is that someone who uses up all of his/her other money and has to tap his/her IRA before age 59 1/2 runs the risk of not having enough money to live on if he/she lives to life expectancy. That’s why I haven’t focused much on pre-59 1/2 withdrawals.
Notwithstanding the above, I’ve had 3 cases where it made sense. One was divorced and instead of dividing the different types of assets, he received all of the IRAs and his wife received all of the other assets. The other two had 8-figure IRAs so it didn’t make sense for them to have to live well below their means until age 59 1/2.