SEPP question

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raaizin
Posts: 10
Joined: Sat Dec 20, 2014 7:55 pm

SEPP question

Post by raaizin » Tue Oct 10, 2017 5:08 pm

If you were to SEPP prior to 59 1/2 can you take less than the recommended rates based on the three calculation methods. For example the lowest amount published for me is 50k but I only want 30k. Can I take less than what my dollar calculation is as long as they are equal amounts each year

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JoMoney
Posts: 4474
Joined: Tue Jul 23, 2013 5:31 am

Re: SEPP question

Post by JoMoney » Tue Oct 10, 2017 7:30 pm

You should discuss this with a tax professional familiar with SEPP, but according to
https://www.irs.gov/retirement-plans/re ... payments#4
You may use any interest rate that is not more than 120% of the federal mid-term rate published in IRS revenue rulings for either of the two months immediately before distributions begin.
So it seems to me if you changed the interest rate used to create the initial calculation to be a rate that generated $30k (per your example), and that interest rate is below 120% of the federal mid-term rate, the lower amount would be within the rules.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Alan S.
Posts: 6947
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: SEPP question

Post by Alan S. » Tue Oct 10, 2017 8:19 pm

JoMoney wrote:
Tue Oct 10, 2017 7:30 pm
You should discuss this with a tax professional familiar with SEPP, but according to
https://www.irs.gov/retirement-plans/re ... payments#4
You may use any interest rate that is not more than 120% of the federal mid-term rate published in IRS revenue rulings for either of the two months immediately before distributions begin.
So it seems to me if you changed the interest rate used to create the initial calculation to be a rate that generated $30k (per your example), and that interest rate is below 120% of the federal mid-term rate, the lower amount would be within the rules.
You cannot change the interest rate used in your initial calculation unless you adopt a recalculated SEPP. These are very rare and while the IRS has approved them, they rarely see one and would likely not understand it. With a recalculated SEPP, each year at the same time you must recalculate your distribution including an updated account balance, updated age, and updated interest rate. Since a new calculation is done every year, the chance of an error is multiplied.

Of course, you could use a 0 rate for the initial calculation, or you could do the one time switch to the RMD method at any point. This roughly reduces the payout by around 35%. Using a 0 rate will not reduce the payout very much since the max rate is currently very low.

The recommended approach to take if your IRA assets generate more than you need is to partition your IRA account by direct trustee transfer into two IRA accounts, one holding the amount needed to generate the desired SEPP distribution, and the other one outside the plan that can be used for emergencies or perhaps a later second SEPP account. This is effect is an insurance policy against busting your SEPP even though emergency distributions from the second account will be subject to the penalty. Partitioning the IRA into two accounts must be done prior to the first SEPP distribution.

raaizin
Posts: 10
Joined: Sat Dec 20, 2014 7:55 pm

Re: SEPP question

Post by raaizin » Wed Oct 11, 2017 6:48 pm

AlanS,


thanks for this info, just what I was looking for.

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