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Submitted by Brendan Walsh on Tue, 2017-03-14 18:41

I established a SEPP from an IRA valued at approx 200k two years ago. I segregated the amount that would satisfy the total number of payments required to fullfill the agreement in a separate IRA, about 60k. Now need 10k more from the remainder of the larger balance. Considering that the SEPP was calculated on the whole, if I take the 10k I need from the larger account that annual payments have not been coming out of, will IRS apply the penalty on the whole?



Submitted by Alan - IRA critic on Tue, 2017-03-14 19:10

  • You should have documentation of your calculation showing the two IRA accounts, since you used the total value for the calculation. On 200k of total IRA value, your annual SEPP distribution is probably around 9k or so. While you can take the 9k  in any combination from these IRAs, you should keep the documentation handy if the IRA asks about a 1099R from an account that they have not seen a 1099R recently. However, if your SEPP calculation was 9k, taking any more than that out of either account will bust the plan. You will have two 1099R forms showing more like 19k which is a sure sign that your plan is busted if you claim the SEPP penalty exception on the entire amount. But even if you paid the penalty, you technically have busted the plan because each account was part and parcel of your SEPP plan from the start. You would owe retroactive penalty and interest on all penalty free distributions you have taken from the start of the plan.
  • Now if you did not use the other account value to do the original calculation, you could take a distribution of any amount you wanted from the other account without busting the plan. But you would owe the penalty on that distribution. The difference here is that you used the value of the other account do calculate your annual distribution so both accounts are part of your plan.

Submitted by Brendan Walsh on Wed, 2017-03-15 15:55

That’s exactly what I needed to know.  Thank you Alan.  My gut told me this would be the case, but wanted to get the real answer from an expert. Thanks again.

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