Basic 72t Calculations
ESOP participant retiring at age 54. Transferring 1.19 Million to IRA and wants max 72t payments. Husband/beneficiary is 62 years old.
1st monthly distribution date estimated Jan 15, 2013. Using 120% of December mid-term (.95) is 1.14%. Since she wants max payments, our calculations give us $46,275.05/year under the amortization method, using 1.12% interest rate. Assumed 6% investment rate.
Since this is our first 72t, are we missing anything here?
Can the SEPP be rounded to the nearest dollar, or must it be exact to the penny?
Under what circumstances, if any, can the SEPP be raised or lowered before 59 1/2?
Permalink Submitted by Alan Spross on Tue, 2012-11-27 22:29
The annual SEPP distribution should not be rounded, but if monthly distributions are desired, the annual amount can be divided by 12 and the result rounded to the nearest cent.
SInce the first distribution will be in 2013, the participant’s age must be the attained age as of 12/31/2013. If that is 55, it will increase the distribution vrs 54. You should use 1.14%, but you mentioned 1.12 later in your post. Let me know the correct age and I will check the calcs. Also, is the account value exactly 1,190,000 on an approved valuation date?
Once you get the correct annual distribution, the only way it could be increased along the way would be to adopt a fairly rare recalculation method. Under recalculation, you would use the new account balance every year end, the current interest rates (which could rise later on), and the new attained age. The IRS does not see many of these and using recalc increases possible IRS scrutiny, ie they might request copies of the various calculations. Also, if the IRA sustains losses, the distribution might also go down.
Therefore, it might be prudent to pass on recalculation. Using a normal plan, there is no option for increase, but there is an option for reduction by using the one time switch to the RMD method. That usually drops the distribution 30-45% assuming no large account value changes.
Note 1: If participant retires in the year they reach 55 (can be before actually reaching 55), they can take plan distributions without penalty, and if such distributions can be flexible, a SEPP can be avoided.
Note 2: Was NUA considered for the shares? Cost basis should be under 30% of current FMV.
Permalink Submitted by john sklenar on Mon, 2012-12-31 18:26
Alan — the exact figures are as follows: Date of birth Jan 12, 1959. IRA opening balance as of 12-28-2012 is $1,202,504.52. It is transferred from ESOP. She retired on August 31, 2012.There is no basis or NUA. Using 1.14% as the interest rate.We want to start monthly payments on January 15th, 2013. Thus, 12 payments in 2013.Our annual SEPP is $46,899.13, using the amortization method to get the largest amount. The monthly payment would be $3,908.27. We should round up? Do you see any mistakes I might be making, or other problems here?
Permalink Submitted by Alan - IRA critic on Mon, 2012-12-31 19:47
Looks good. I get 3,908.26 monthly (rounded to nearest cent). Be sure she retains a copy of an on line printout showing the account balance and date of that balance. If there is any problem documenting that, just use the 12/31/2012 balance instead and do everything else the same.