SEPP

Submitted by Kevin Vasilik on Tue, 2013-11-05 03:45

In setting up a SEPP, do you have to use the total value of ALL of your IRA’s or just the one that you will withdraw from? And can you then just draw from one of the IRA’s?

How do you calcualte the “Reasonable Interest rate”?

If starting in January 2014, you take the December 31st value of all of you IRA’s for the calculation?

Which age do you use? The age you will be in 2014, even if the birthday is in December?

In using the Single Life Expectancy method, it appears that the Beneficiary Age does not matter?

Also, in using the single life expectancy, the annual distribution is recalculated each year?

Can you do a recalculation anytime after the 5 years and age 59 1/2 is achieved, for example in year 8? This person will be age 54 in December 2013.



Submitted by Alan - IRA critic on Tue, 2013-11-05 16:33

  • You can use as many of your IRA accounts as you wish, usually set up with the total account balance you need to generate the distribution you need. Once the accounts are selected to be included in the SEPP, you can withdraw your SEPP distribution from any or all of them. All this said, the simpler the better since the chances of error is less and the chance of an IRS inquiry is less.
  • The interest rate is limited to the higher of the 120 midterm rates published for either of the two months preceding the month of your first distribution. That will provide you with the largest distribution per dollar of account balance. The account balance you do not need for the SEPP should be partitioned into a separate account for emergency needs. This will help save your SEPP if you need an emergency distribution.
  • It is simpler to use the 12/31 balance for the accounts in your plan for a plan that starts early in the year, but you don’t have to. You could use any recent balance you can document that is representative of the balance when you take your first SEPP distribution. By “representative”, you are probably OK if the balance is within 15% of the balance when your distribution is ordered.
  • The age used is your age at the end of the year in which your first SEPP distribution is taken.
  • The beneficiary age does not matter when using single life expectancy, and single life expectancy is recommended as it produces the largest distribution.
  • Recalculation has been approved by the IRS, but it is rarely used and increases the chance of error. The IRS typically looks for the same distribution each year, so recalc attracts attention. Normally you would not recalculate and the distribution will be the same each year. You therefore only do one calculation before starting the plan. In your first year you can take out either the full annual amount or an amount pro rated by the month, eg August start you could take either full annual or 5/12 of the annual.
  • If a recalc plan is selected, the calculation must be at the same time each year, using the available interest rate at that time and account balance at that time as well as new age attained by year end, eg account balance every 12/31. Again, I would not advise recalculating. A person age 54 will have a plan that only runs 5.5 years. The plan might be started before year end if there is some doubt about the distributions being large enough, since that would allow a full distribution for 2013 to get a head start. Funds could be saved for later emergencies.

Submitted by Kevin Vasilik on Wed, 2013-11-06 03:07

Thank you for your detailed answers.  Always a help.  I’m still a little confused about the recalculation answer.  I didn’t mean to recalc between the ages of 54 to 59 1/2, I meant, after the person is say, age 60 or 62 when SS starts, aren’t they allow to stop the distributions as long as the distributions have been in place for 5 years?You answer to the recalc also leads me to believe that once the annual distribution is calculated, we stick with that amount no matter what the IRA account values change to year over year.Everything else is very clear and understood.Thanks again, always a big help. 

Submitted by Alan - IRA critic on Wed, 2013-11-06 04:01

This person’s plan will automatically end upon reaching 59.5 since that date is the longer of 5 years or age 59.5. This date is called the modification date, after which she can do whatever she wishes with the IRA. There will no longer be a penalty after 59.5 (June, 2019). There is also another option she can take. If her distributions are more than she needs, she can make a one time switch to the RMD method effective 1/1 of any year before the plan ends. If the IRA is still valued about the same as when the plan began, this would tend to reduce the 72t payout around 40%. Otherwise, the annual payment would not change and no new calculations are needed.

Submitted by Kevin Vasilik on Thu, 2013-11-07 13:47

Thank you for your continued help with these fine points.  Much Appreciated.

Add new comment

Log in or register to post comments