SEPP 72T elect recalculation
Client is 59 now. Started SEPP 10 years ago. Drawing fixed amount for the entire period. Is there an alternative available to substantially reduce the SEPP and if so is it worth doing within 6 months of turning 59 1/2? Thanks
Permalink Submitted by Alan Spross on Thu, 2012-05-17 00:18
Yes, there are a couple of possibilities.
What is client’s DOB?
Permalink Submitted by Steve Waller on Thu, 2012-05-17 01:07
Birthdate is 05/09/1953
Permalink Submitted by Alan Spross on Thu, 2012-05-17 01:41
OK, then client reaches age 59.5 on 11/9/2012.
In 2012 client has 3 options for distributions prior to 11/9.
1) Take out nothing
2) Take out the fulll annual amount
3) Take out 10 months worth (.833 of the annual) which is pro rating through the last month before the plan ends.
Option 1 will obviously preserve more of his IRA. Option 2 is not much help since he reaches 59.5 so late in the year.
If client has already taken out some money this year and therefore already eliminated Option 1, he could make the one time switch to the RMD method effective January 1. And he could also pro rate that using the .833 factor. The RMD method can reduce the distribution considerably and would be based on the 12/31/2011 account balance and age 59.
Permalink Submitted by Steve Waller on Thu, 2012-05-17 14:37
Can you point me to the rules?
These aren’t private letter rulings are they?
Thanks
Permalink Submitted by Alan Spross on Thu, 2012-05-17 18:43
Basically, very little regarding 72t “rules” are included in the tax code. RR 2002-62 contains the basics, but the 3 options for the final year of a plan that is NOT a 5 year plan (ie 5 years was a longer time frame than reaching 59.5) has evolved through a combination of IRS acquiesence and several PLRs over the last 15 years. Here is a list of some applicable PLRs from the 72tnet website, which is a site dedicated exclusively to 72t plans. This site is needed because of the absence of formal rules, and it consolidates most of the known information on the subject. Here is a link to a page indicating PLRs of interest:
http://www.72t.net/72t/PLRs
Note that one of these PLRs addresses a taxpayer making the one time switch of the RMD method and rolling back distributions taken in the last 60 days that exceeded the RMD annual distribution.
With respect to the 3 options for the final year, what he cannot do is take a distribution prior to the modification date (11/9/2012) that is NOT considered a 72t distribution option. An example of that would be a a different amount than the 3 options.
The option of taking -0- in this case exists because these are calendar year plans and reaching 59.5 before the end of the CY means that the plan ended before the CY requirement had to be met. Taxpayer has to have taken a minimum of 60 months out (5 years) in order to take out 0 in the final year, but this taxpayer met that requirement years ago.
In addition, for this client, I would also recommend that he take nothing out in 2012 AFTER the plan ended even though he is totally unrestricted after 11/9. That way, there would be no 1099R at all to deal with if he takes out nothing for the entire year, and if he opts for one of the other options he will only have to deal with one 1099R rather than second one coded 7 for any post 11/9 distribution.
Permalink Submitted by Steve Waller on Fri, 2012-05-18 14:22
Thanks Alan,
I use the same site and I was looking for confirmation of what I understood. Your explanations were extremely helpful. Client fits the RMD election with 60 day rollback as best option. Thanks again for the excellent support.