Good point. Nursing home costs in this area average $130K per year per individual. Last week, three elder care facilities in our small state closed--lack of staff and/or unsustainable operating costs. Not a bright future.
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When to retire?
- Thread starter BornToFly
- Start date
SageBrush
REJECT Fascism
Oh, I didn't realize that the gov sets the withdrawal rate. It sounds similar to the pension funding planning I had to pay an actuary to do in order to set up a defined benefit plan for my one owner/one employee business.
Yeah, you can do a one time switch to RMD which is variable (and has the lowest initial payout), and can help extend things if the account value drops due to market losses.
Yes, they use actuarial tables to assume how long you (and your spouse, if you choose) will live and the current interest rates to determine your withdrawal amount. For me, using single life and the fixed amortization method resulted in the highest possible amount that I could withdraw per year. That number will remain fixed until I turn 59.5. You can also change from either of the fixed amounts to the RMD method once during the SEPP period.
Actually, you can make any changes you want to the SEPP, but you WILL face hefty IRS penalties for doing so (backdated penalties on ALL years of your SEPP). Keep this in mind before you set one up.
The RMD method seems to always be the lowest amount, but, if your account rises in value over the years, switching to the RMD method could actually raise your withdrawal amount.
Substantially Equal Periodic Payments | Internal Revenue Service
Insights into substantially equal periodic payments under IRC section 72(t)(2)(A)(iv), with examples.
:max_bytes(150000):strip_icc()/rule72t.asp-Final-fd4355e09b1049408af4b5f570d35f96.png)
Rule of 72(t): Definition, Calculation, and Example
Rule 72(t), issued by the Internal Revenue Service, allows for penalty-free withdrawals from an IRA account and other specified tax-advantaged accounts.
adiggs
Well-Known Member
A couple of folks with SEPP experience! I'm wanting to set one up and am stuck on the most mechanical of stuff. I've found the calculators online so I have a good idea of what sort of annual withdrawal I can take. However - is there an IRS form that I send in with my taxes the first year declaring that I'm starting an SEPP, the amount I'm basing on, my withdrawal rate - the stuff the IRS would need to know, so they also know I'm not cutting corners?Yes, they use actuarial tables to assume how long you (and your spouse, if you choose) will live and the current interest rates to determine your withdrawal amount. For me, using single life and the fixed amortization method resulted in the highest possible amount that I could withdraw per year. That number will remain fixed until I turn 59.5. You can also change from either of the fixed amounts to the RMD method once during the SEPP period.
Actually, you can make any changes you want to the SEPP, but you WILL face hefty IRS penalties for doing so (backdated penalties on ALL years of your SEPP). Keep this in mind before you set one up.
The RMD method seems to always be the lowest amount, but, if your account rises in value over the years, switching to the RMD method could actually raise your withdrawal amount.
Substantially Equal Periodic Payments | Internal Revenue Service
Insights into substantially equal periodic payments under IRC section 72(t)(2)(A)(iv), with examples.www.irs.gov
Rule of 72(t): Definition, Calculation, and Example
Rule 72(t), issued by the Internal Revenue Service, allows for penalty-free withdrawals from an IRA account and other specified tax-advantaged accounts.www.investopedia.com
Or do I just start taking withdrawals and at tax time I tell them the withdrawal is an SEPP and not subject to the 10% penalty, and then I have my detailed calculations at hand when/if audited?
I'd like to be able to set this up myself, or with the help of my own hired professional. Any pointers or insights into the mechanics of establishing and operating these would be hugely appreciated.
I have not had a full year under this plan, so I can't speak about filing taxes, but setup was really easy. I contacted Fidelity, where my IRA is located, they pointed me to a form on their website (or they could have emailed it to me), which I had to print, fill out, sign, and mail in. They sent me a letter a week or so later confirming my choices and then I just waited for the direct deposits to begin.
I had previously set up my checking account as able to accept funds from Fidelity - that was a whole other process - at the time I had to physically go to one of their offices to prove who I was. I don't know what their procedures are now, mid-pandemic.
adiggs
Well-Known Member
Yeah - I'm with Fidelity also but I'm also looking to move the retirement accounts to a new broker with lower fees. I'm pretty sure that the new broker won't do the paperwork to set one of these up, so I'm hoping to find insight into those mechanics.
Thanks!
dgpcolorado
high altitude member
That isn't strictly true. There are constraints and three IRS accepted methods for calculating SEPP:
(From the Investopedia link from @CarlS above.)
In my case the "life expectancy method" (same as RMD calculations using life expectancy tables), while easiest to figure, provided too little to live on given my young age — the younger you are, the lower the percentage you can take out, for obvious reasons — longer life expectancy.
It wasn't until I found that I could use the "amortization" method instead that I realized that I could take out a much higher payment. The amortization calculation is dependent on the interest rate used and that, in turn, has limits. However, if the maximum interest rate allowed generates a payment higher than needed/wanted, you are able to use a lower figure. I settled on my 6% based on it being enough for my purposes and below the highest rate allowed by IRS guidelines at the time.
So, there is some flexibility in setting up the initial payment scheme. After that you have to stick with it, save for the single exception mentioned by @mongo above. The penalties for missing a payment are severe; in my opinion SEPP is only for detailed-oriented people who absolutely will be able to make the required payments on time!
adiggs
Well-Known Member
I found this:
If I'm interpreting this correctly then I can take my own withdrawals on a schedule, and those withdrawals will be reported on 1099-R. Ideally the brokers already knows these are SEPP withdrawals and thus not subject to the 10% penalty, but it also looks like I can tell the IRS that the withdrawals are SEPP withdrawals (even if the broker doesn't code them that way) and not subject to the 10% penalty.
I'd use whatever scheduling function the broker has to make withdrawals of the correct size at the correct frequency (I'll probably do quarterly rather than annual).
It's these sorts of mechanics that I'm trying to understand. (Thanks again)
dgpcolorado
high altitude member
My recollection is that you set it up and just start taking distributions. When you take a distribution you specify what it is for to the account company (Fidelity, in my case). When you get your 1099R for the account Box 7 will have a code in it. You want it to be a "2" (early distribution exception applies). Mine got marked "1" (early distribution no known exception). Perhaps this was because I didn't have Fidelity set up the SEPP, I just did it on my own, can't say.
Each year, as part of my tax return, I filed Form 5329 "Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts". On line 2, the taxable amount of the distribution, I entered "2" as the exception number. I believe that I had to file that form because my 1099R was mis-marked with a "1", to verify that I qualified for an exception.
My guess is that if you get a 1099R with a "2" in box 7 you won't need to file that form. In my case Fidelity didn't know for sure that the SEPP exception applied so they marked it with a 1.
Please be aware that things may have changed since I took my last SEPP distribution years ago.
Edit: Since I turned 59½, box 7 on my 1099R form has been marked with a "7" (Normal distribution).
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It varies by firm, but Vanguard lets you set up auto distributions. The most timing critical part is selling holdings to fund the money market account in time for it to settle and be transferred out. Still, the only issue is procrastination.
adiggs
Well-Known Member
This is awesome info and exactly the sort of thing I was looking for. I've found the IRS site with the details on doing the calculation, so I'm confident I can do that end of things.
dgpcolorado
high altitude member
Agree. The reason I wanted nothing to do with automatic distributions is that I had to decide what to sell and when, and wanted compete control over that process. Back then I didn't keep cash in money market funds earning little, save for right before I wanted to take a distribution at the end of the year (December).
Nowadays I keep some cash to take advantage of market or individual stock/fund corrections (March 2020, for example), since the markets are crazy high, by my standards. I prefer to buy stocks and stock funds when they are "on sale."
adiggs
Well-Known Member
Couple of incremental things I've learned / figured out for my own situation.
1) For funding the periodic withdrawals, that'll be easy for me. I'm maintaining a cash balance that I use to sell puts against. The annual withdrawal amount is small enough that leaving enough cash unencumbered is pretty straightforward.
2) A general note for all - the SEPP looks like a pretty bad idea against a ROTH IRA. You'd avoid the 10% early withdrawal penalty, and you can still withdraw the contributions that you make. But the SEPP withdrawals show up as ordinary income that you'll pay taxes on, rather than the cash with no taxes due that you can get once you reach 59 1/2.
In my case the ROTH constraint is sort of big - through sheer dumb luck (I wish I'd planned it this way - at least it happened this way), our original TSLA purchase in 2012 is in our ROTH. That position is my first, and my second, 10 bagger. That account has grown .. big.
dgpcolorado
high altitude member
^ A lot depends on your tax situation. In general, it is best to keep a Roth IRA growing tax-free and draw, slowly, from a taxable IRA (via SEPP plan if younger than 59½). The idea is to take money out of the taxable IRA a little at a time to keep the tax bracket low — in my case my withdrawal was fairly small and, thus, my tax bracket was micoscopic.
One reason for doing this is that at age 72 (used to be 70½) one must begin Required Minimum Distributions (RMD). If you have depleted your taxable IRAs before this age (as I have) you don't need to fuss with RMDs. [I trust that it is understood that Roth IRAs are completely exempt from RMD.]
Another way to deplete the taxable IRAs before RMD age is to gradually convert some of the money to a Roth IRA, taking care to do only enough each year to stay in a low tax bracket. If you do this over enough years the tax hit can be quite low, assuming a low income, as is the case for many who have retired young — little or no earned income and no Social Security income yet. The calculations might be different for those few who have pension income.
Even if you can't fully deplete your taxable IRAs, just lowering the size will reduce the amount of the required RMDs and reduce the resulting tax hit. It isn't an either/or situation.
One reason for doing this is that at age 72 (used to be 70½) one must begin Required Minimum Distributions (RMD). If you have depleted your taxable IRAs before this age (as I have) you don't need to fuss with RMDs. [I trust that it is understood that Roth IRAs are completely exempt from RMD.]
Another way to deplete the taxable IRAs before RMD age is to gradually convert some of the money to a Roth IRA, taking care to do only enough each year to stay in a low tax bracket. If you do this over enough years the tax hit can be quite low, assuming a low income, as is the case for many who have retired young — little or no earned income and no Social Security income yet. The calculations might be different for those few who have pension income.
Even if you can't fully deplete your taxable IRAs, just lowering the size will reduce the amount of the required RMDs and reduce the resulting tax hit. It isn't an either/or situation.
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Thanks for the info on the Roth..
I was planning on doing the 72-t but all my IRA money has been rolled over to the Roth over the years and like you, my earliest purchases in TSLA have been in the Roth..
[Or incomplete, depending on the status of a non-qualified SEPP withdrawl of earnings]
[[I see, unqualified Roth earnings withdrawls are taxable, and apparently that carries through on the early part of a SEPP also. However, the contributions are the first things withdrawn, so a rollover would start out untaxed + unpenalized with a SEPP (but rollover can have a worse effective tax rate]]
First off, with Roths, the principle is always untaxed and there is no penalty on withdrawl at any time. For a rollover amount, it needs to age 5 years or you're over 59.5 . For earnings, they need to sit 5 years from the first contribution and be over 59.5. So, you do not need a SEPP to pull direct contributions from a Roth nor rollover amounts older than 5 years.
A SEPP plan allows distributions from earnings before 59-1/2 without the penalty and retains the Roth tax free status. (May remove the 5 year rule too?)
Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs) | Internal Revenue Service
https://advisor.morganstanley.com/t...antic-group/912950-72tdistributions-guide.pdf
Using 72(t) Rules For Penalty-Free Income | Bankrate.com
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adiggs
Well-Known Member
Thank you for challenging me on this @mongo.
Some searching and yes, I think that came from the moneycrashers site. I've always believed that ROTH withdrawals via SEPP were were not taxed.
Looking for more info led me here:
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Are Roth IRA Distributions Taxable?
All Roth IRA distributions are not taxed if you wait until you're 59 1/2. Before that age, you can withdraw your Roth IRA contributions tax-free, but earnings will be taxed.
I looked at the IRS stuff and I didn't find that clear on this very specific point. The Morgan Stanley stuff also looks ambiguous to me on this point:
I read this as:
1) yes you can take distributions
2) the contributions can be withdrawn penalty and income tax free (In my case, I don't care - the original contributions are trivial)
3) The money line that could have made this clear -- 'only be used for a Roth .. want to withdraw earnings after exhausting contributions'.
They -could- have said what when earnings were distributed via SEPP they would be income tax free.
From the IRS Pub:
This seems to be the full list of qualified distributions (for earnings).
My takeaway - I'm not a tax pro. NOT-ADVICE.
I've always thought that the ROTH withdrawals via SEPP would be income tax free but now I'm unsure. If one has $10k worth of contributions in a $1M account, then the ability to withdraw the $10k with no penalty or income tax owed is kind of trivial. I'll find a tax pro to clear this up before I start a SEPP from my Roth IRA.
Thank you for challenging me on this @mongo.
Some searching and yes, I think that came from the moneycrashers site. I've always believed that ROTH withdrawals via SEPP were were not taxed.
Looking for more info led me here:
Are Roth IRA Distributions Taxable?
All Roth IRA distributions are not taxed if you wait until you're 59 1/2. Before that age, you can withdraw your Roth IRA contributions tax-free, but earnings will be taxed.www.thebalance.com
I looked at the IRS stuff and I didn't find that clear on this very specific point. The Morgan Stanley stuff also looks ambiguous to me on this point:
I read this as:
1) yes you can take distributions
2) the contributions can be withdrawn penalty and income tax free (In my case, I don't care - the original contributions are trivial)
3) The money line that could have made this clear -- 'only be used for a Roth .. want to withdraw earnings after exhausting contributions'.
They -could- have said what when earnings were distributed via SEPP they would be income tax free.
From the IRS Pub:
This seems to be the full list of qualified distributions (for earnings).
My takeaway - I'm not a tax pro. NOT-ADVICE.
I've always thought that the ROTH withdrawals via SEPP would be income tax free but now I'm unsure. If one has $10k worth of contributions in a $1M account, then the ability to withdraw the $10k with no penalty or income tax owed is kind of trivial. I'll find a tax pro to clear this up before I start a SEPP from my Roth IRA.
I think Roth through SEPP will be taxed as income but without the 10% penalty. There is a lot of good info on 72tnet.com. This document https://72tnet.com/wp-content/uploa...-To-SEPPS-and-IRC-72t-Bill-Stecker-4th-ed.pdf is pretty exhaustive but is from 2004 so some things may have changed.
Page 42 of that article talks about qualified vs. unqualified and it seems to me that SEPP is not actually "qualified" by that definition:
A qualified distribution is one that is BOTH:
1. Made after a 5-taxable-year period, and
2. Made on or after the date on which the taxpayer attains the age of 59½, or made to a beneficiary or the estate of the owner on or after the date of the owner’s death, or attributable to the owner’s being disabled, or for a first time home purchase.
An unqualified distribution is any distribution that does not meet the two rules above.
One thing I just noticed on page 96 of that document is the idea of combining a Roth with an IRA for the purposes of increasing the total balance in order to calculate a higher distribution - but then to only take the distributions from the IRA, leaving the Roth untouched and avoiding the unqualified tax issue. Anyone have thoughts on that?
Yeah, I double edited my post, so it is updated from your reply. (I should never try thinking before eating)Thank you for challenging me on this @mongo.
Some searching and yes, I think that came from the moneycrashers site. I've always believed that ROTH withdrawals via SEPP were were not taxed.
Looking for more info led me here:
Are Roth IRA Distributions Taxable?
All Roth IRA distributions are not taxed if you wait until you're 59 1/2. Before that age, you can withdraw your Roth IRA contributions tax-free, but earnings will be taxed.
I looked at the IRS stuff and I didn't find that clear on this very specific point. The Morgan Stanley stuff also looks ambiguous to me on this point:
I read this as:
1) yes you can take distributions
2) the contributions can be withdrawn penalty and income tax free (In my case, I don't care - the original contributions are trivial)
3) The money line that could have made this clear -- 'only be used for a Roth .. want to withdraw earnings after exhausting contributions'.
They -could- have said what when earnings were distributed via SEPP they would be income tax free.
From the IRS Pub:
This seems to be the full list of qualified distributions (for earnings).
My takeaway - I'm not a tax pro. NOT-ADVICE.
I've always thought that the ROTH withdrawals via SEPP would be income tax free but now I'm unsure. If one has $10k worth of contributions in a $1M account, then the ability to withdraw the $10k with no penalty or income tax owed is kind of trivial. I'll find a tax pro to clear this up before I start a SEPP from my Roth IRA.
I thought they would be tax free also, but it appears they retain their tax status. So all contributions are tax free under a 72(t) plan, but earnings are not qualified (tax free) until 5 years and age > 59-1/2 (or other special cases).
So, Roth direct contributions and 5 year old conversions are freely accessible (no SEPP needed), and a SEPP allows penalty free acess to newer than 5 year conversions and earnings (taxed).
The edge case I thought of is a non trustee Roth to Roth transfer, that would theoretically turn the entire balance to a rollover. If such a thing can be reasonably done .
This site has a nice write up (though they use "traditional IRA" at the end producing ambiguity regarding Roth).
https://blog.massmutual.com/post/retire-early-avoid-penalties
It also mentions a thought I had that the 10% penalty might not be so bad in some circumstances.
OH! That's what they were talking about. Interesting approach, since I have a lot of IRAs from individual 401k rollovers, and it would be more flexible not to SEPP all of them. Especially if the balances (or interest rates) grow allowing higher distributions later.
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