Opening a new IRA account while taking 72t SEPP distributions from another account

Submitted by James Peterson on Mon, 2015-03-09 00:18

I am currently taking 72t withdrawls from and IRA account that I have used to setup the SEPP. If the SEPP withdrawl amount in a given year is greater than needed, can I use the excess to fund another non-72t IRA without affecting (i.e., breaking) the 72t plan?



Submitted by James Peterson on Mon, 2015-03-09 00:24

Note I would do this to defer paying taxes on the excess distribution amount.



Submitted by Alan - IRA critic on Mon, 2015-03-09 04:12

  • Sounds like the excess distribution was a mistake that you caught within 60 days. What you propose is a partial rollover to a new IRA account such that the net distribution remains the same as always. While it is best not to attract attention from the IRS by doing this, your plan should be OK. Note that on a couple of occasions the IRS has busted a plan when a partial transfer was done, but those were aberrations and never adequately explained by the IRS. Still, there is a minor risk involved.
  • There would be less risk if you simply rolled the amount back to the same  SEPP IRA account and that would avoid the partial transfer to another account. You are now allowed only one such 60 day rollover for all your IRA accounts within a 12 month period. Therefore, if you do this now, you cannot do another one until at least 366 days have passed.

 



Submitted by [email protected] on Mon, 2015-03-09 13:23

Sounds to me that he is taking the proper SEPP amount, he just doesn’t need it all and wants to avoid the taxes on the amount above what he needs for Standard of Living.  This is the amount he wants to put into a new IRA, and be able to deduct the contribution.  I would think he would have to have earned income, below limits, that would allow him to contribute and deduct.



Submitted by Alan - IRA critic on Mon, 2015-03-09 15:01

That could be the situation and if so this can be done under the usual requirements including the dollar limit for a regular IRA contribution. No rollover would occur. If the SEPP distributions will consistently exceed what is needed, he could also make the one time switch to the RMD method as that typically results in a substantial reduction of the distributions.



Submitted by James Peterson on Tue, 2015-03-10 18:30

Yes I am taking out the proper SEPP amount, which I withdraw lump sum at the beginning of the year (paying quarterly estimated tax on the withdrawl amount). Last year however, our earned income was larger than expected, so we really don’t need the whole SEPP withdrawl amount, plus were in a higher tax bracket than anticipated. So we would like to open an new IRA account and fund it with the maximum annual contribution based on our circumstances. Which should be $6500 for married filing jointly with only one spouse covered by a retirement plan and earning less than $181,000. I just wanted to be sure that opening another IRA, while taking SEPP withdrawls would not break the SEPP. I haven’t seen anything that would suggest it would, but as you already know, the SEPP rule are a little convoluted in many respects.Thanks for the feedback



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