72t SEPP calculation referral
Hello,
We are the Custodian for an IRA from which the owner wishes to set up a last minute SEPP to begin this year. This individual’s tax preparer at HR Block informed her that the IRA Custodian is required by law to determing the best method of calculating the SEPP so as to provide the best tax advantage. Apparently this indivudual’s financial circumstances will allow them to take on more income without incurring any tax liability and they have determined a 72t SEPP would be the best way to obtain this extra income.
When we received this request we of course informed the individual that this would be the job for a personal financial professional, and that as an IRA Custodian we do not offer calculation services for SEPPs let alone a more thorough analysis to provide a distribution taylored to their financial/tax situation. Being that the HR Block representative had already opened pandora’s box by stating that there was a law requiring us to do exactly what we just declined to do, the client was not happy. In fact, the HR Block representative is sticking to their guns and insisting that we are obligated to complete such a calculation and financial analysis, free of charge.
I’m not prone to chasing someone else’s imaginary rabbits but still I’ve offered to confirm directly with the IRS, with the client and HR Block representative on the phone as well, that there is no such law. The client and representative have now rescheduled this call for next week. When the news breaks for this person that they cannot compell us to provide this service, paid or not, they will be left with little time to get the SEPP details worked out and have the first distribution processed.
I would love to have a referral ready for her so as not to leave her scrambling to find someone on her own. If anyone knows of someone willing to provide this service during the final few days of the year in the Northern California area, specifically the San Francisco Bay Area, it would be greatly appreciated.
Permalink Submitted by Alan Spross on Fri, 2011-12-23 21:24
I can’t help with the bay area referral, but there is no such law as you know. In fact, most custodians have washed their hands of underwriting SEPP plans because so many of the requirements evolved from various IRS letter rulings and Notices (mostly 2002-62), rather than a clear set of rules in the tax code. Very few custodians even offer to provide the SEPP exception code 2 on their 1099R. This is logical when youy consider that a taxpayer could conceivably have a 72t plan involving two different IRAs at different custodians with each custodian unaware of the other account, and the annual distribution could be aggregated between the two accounts. Not advisable, but it could still be a valid plan.
Perhaps this owner wants to start the plan this month in order to be able to take a full year penalty free distribution for 2011, and that is clearly allowed. The other option is to take out 1/12 of the annual amount. The plan officially starts on the date of distribution rather than on the date of receipt, therefore the first distribution must be on a 2011 1099R if the plan is deemed to start in 2011. The interest rate just released for January is a record low rate of 1.40. (That rate can only apply to plans that begin in Feb or March).
Advisors fully knowledgeable on 72t plans are few and far between, and IRS expertise on these plans is quite limited as well. The entire situation is much more opaque than it should be. Almost always, the simpler the plan is structured the better. It would be a mistake to rush into a plan without clearly thinking it through since the exact distribution will have to suffice for the greater of 5 years or until 59.5.
The following are the planning pointers from the 72tnet website. This is the best and pretty much the only site devoted exclusively to 72t plan issues:
http://www.72t.net/72t/Planning/Pointers
NOTE: Most of the posts on that site used the site resources and forum to set up their own plans. Many were frustrated by the general lack of expertise in this area and felt comfortable proceeding in that manner.
Permalink Submitted by mk foss on Fri, 2011-12-23 22:59
I’m located in the SF Bay Area and can help. Or we can just discuss it by telephone. I sent urusei2 a private message.
Permalink Submitted by Bruce Steiner on Sat, 2011-12-24 22:27
H&R Block should not be giving legal advice. Nor should the custodian be giving specific legal or tax advice.
If the IRA owner is looking for someone in the San Francisco area, Mary Kay would be an excellent choice. I’ve known her for many years, and she’s a nationally recognized expert on IRAs.
If the IRA owner is under age 59 1/2 and can take additional income without incurring any additional tax, a Roth conversion, in whole or in part, might be preferable to taking distributions.
I wrote an article on avoiding the penalty on early distributions, which appeared in the January 2000 issue of Estate Planning: http://www.kkwc.com/docs/AR20041012155030.pdf. However, it is no longer current as a result of Revenue Ruling 2002-62.