SEPP Universe including 2 laddered 3 year Bank CDs along with Vanguard IRA?

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quisp65
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Joined: Wed Apr 10, 2019 7:44 am

SEPP Universe including 2 laddered 3 year Bank CDs along with Vanguard IRA?

Post by quisp65 » Sat Feb 15, 2020 5:48 am

Just retired at 54 and my 403b plan now says they won't do partial withdrawals after they told me they would. GRRR! %$#@! So I've decided to go the 72t SEPP route and will be able to get 5 years of funds that will be adequate using the single life expectancy & fixed amortization method. My SEPP Universe will include the entirety of my Traditional & Roth IRAs in Vanguard and a CD in Navy Federal. Distributions will always come from my Vanguard IRA. I need the entirety of my IRAs to get my annual distribution high enough. Emergency money will be my wifes IRAs and a pension so I won't break the SEPP.

Before the SEPP route I planned to put most of my fixed income in 2 laddered 3 year Bank CDs that paid the most interest and kept that rotating. Now I question if this might make too many moving parts and create an error that breaks my SEPP.

I could switch back to brokered CDs only, or go with a few trusted big banks like Navy Federal, or take the most risk and always go with the highest paying Bank I find.

Thoughts?

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

Re: SEPP Universe including 2 laddered 3 year Bank CDs along with Vanguard IRA?

Post by Alan S. » Sat Feb 15, 2020 12:49 pm

quisp65 wrote:
Sat Feb 15, 2020 5:48 am
Just retired at 54 and my 403b plan now says they won't do partial withdrawals after they told me they would. GRRR! %$#@! So I've decided to go the 72t SEPP route and will be able to get 5 years of funds that will be adequate using the single life expectancy & fixed amortization method. My SEPP Universe will include the entirety of my Traditional & Roth IRAs in Vanguard and a CD in Navy Federal. Distributions will always come from my Vanguard IRA. I need the entirety of my IRAs to get my annual distribution high enough. Emergency money will be my wifes IRAs and a pension so I won't break the SEPP.

Before the SEPP route I planned to put most of my fixed income in 2 laddered 3 year Bank CDs that paid the most interest and kept that rotating. Now I question if this might make too many moving parts and create an error that breaks my SEPP.

I could switch back to brokered CDs only, or go with a few trusted big banks like Navy Federal, or take the most risk and always go with the highest paying Bank I find.

Thoughts?
Your concern is well founded. Not only too complex, but even if you never make an error, IRS examiners may not understand a 72t universe constructed with a TIRA and Roth IRA since they almost never see such a thing. This unwelcome attention could lead to an actual audit of your plan, so you would need to carefully document all your calculations up front including IRA and Roth statements showing the initial account values as of the same date.

The following link presents a complex tracking of the tax code to conclude that combining a TIRA and Roth IRA in the SEPP universe is doable, should you need to respond to the IRS. See p 96: https://retireearlyhomepage.com/rpt003e4.pdf
The article is 15 years old, but still basically useful.

Other concerns are the brokered CD yields in the last couple of years have become uncompetitive with the on line banks, and if you go with on line banks there is even more of a hassle having to coordinate maturities in ladder fashion and transferring IRA custodians. Fortunately, the annual distribution pattern for a 72t is totally flexible as all that matters is the 1099R showing the correct amount in January. Opting for something like BND instead of CDs would simplify things and you could simply sell shares when needed to fund 72t distributions.

If you include the Roth in your SEPP universe, good idea to just take your distributions from the TIRA. If you took Roth distributions you would have to file an 8606 and would get a separate 1099R for distributions from each type of IRA. They would have to exactly equal your annual 72t amount.

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