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Author: 2inept Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121598  
Subject: 72(t)(2)(A)(iv) SEPP Date: 10/9/2001 5:42 PM
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The 72T process for early withdrawl from IRA's is a bit sketchy. If I establish a withdrawl (SEPP) from one IRA now, can I repeat the process in another IRA in 2-3 years? I am already planning to split the IRA I have into 2 smaller IRA's to facilitate the SEPP. I am 55 and am required to withdraw for the 5 year period. My concern is how to adjust my income if I miscalculate now or if conditions indicate that I need more money 2-3 years from now. I have been told by 2 brokers with the same firm 2 different answers, yes and no. I have not been able to find anyone on the web who has addressed this question.
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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54491 of 121598
Subject: Re: 72(t)(2)(A)(iv) SEPP Date: 10/9/2001 7:13 PM
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2inept: "The 72T process for early withdrawl from IRA's is a bit sketchy. If I establish a withdrawl (SEPP) from one IRA now, can I repeat the process in another IRA in 2-3 years? I am already planning to split the IRA I have into 2 smaller IRA's to facilitate the SEPP. I am 55 and am required to withdraw for the 5 year period. My concern is how to adjust my income if I miscalculate now or if conditions indicate that I need more money 2-3 years from now. I have been told by 2 brokers with the same firm 2 different answers, yes and no. I have not been able to find anyone on the web who has addressed this question."

While I am certain that the resident pros here can answer this question, you might to review the Retire Early board (in Speakers' Corner), where SEPPs have been discussed in excruciating detail (but not much recently); if you put the board in threaded mode and go back a year or two, you would find plenty of information.

Regards, JAFO
(who believes that the answer is yes)


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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54493 of 121598
Subject: Re: 72(t)(2)(A)(iv) SEPP Date: 10/9/2001 8:00 PM
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The 72T process for early withdrawl from IRA's is a bit sketchy. If I establish a withdrawl (SEPP) from one IRA now, can I repeat the process in another IRA in 2-3 years? I am already planning to split the IRA I have into 2 smaller IRA's to facilitate the SEPP. I am 55 and am required to withdraw for the 5 year period. My concern is how to adjust my income if I miscalculate now or if conditions indicate that I need more money 2-3 years from now. I have been told by 2 brokers with the same firm 2 different answers, yes and no. I have not been able to find anyone on the web who has addressed this question.

The answer to your basoc question is "YES"; in fact your tactical planning options are probably broader than you suspect in this regard. I suggest the you visit the Retire Early Home Page board here at the Fool and search under "SEPP" or "72t". This will give you a basic understanding of the details. Form more detail, I would suggest that you visit: http://www.retireearlyhomepage.com/ & take a look at report #3.

TheBadger


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Author: Charlie48K Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54494 of 121598
Subject: Re: 72(t)(2)(A)(iv) SEPP Date: 10/9/2001 8:08 PM
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My concern is how to adjust my income if I miscalculate now or if conditions indicate that I need more money 2-3 years from now.

I don't think you understand SEPP. It's substantially equal payments over your expected life, not some shorter period. I think there's three methods to chose from. This has to continue at least 5 years. They usually use mortality tables. You may be able to change some assumptions, but I don't they'll significantly effect what you can take out. Go to an expert in this subject.

Also, what purpose do you think spliting your IRA does? As far as any calculation goes, I believe the IRA adds them together. They do when calculating how much of IRA withdrawls relate to before and after tax contributions when you've made both. I see no reason why SEPPs should be different.

You really need to see an expert.

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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54495 of 121598
Subject: Re: 72(t)(2)(A)(iv) SEPP Date: 10/9/2001 8:23 PM
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I don't think you understand SEPP. It's substantially equal payments over your expected life, not some shorter period. I think there's three methods to chose from. This has to continue at least 5 years. They usually use mortality tables. You may be able to change some assumptions, but I don't they'll significantly effect what you can take out. Go to an expert in this subject.

Most people do not understand SEPPs; hwever, there is substantial flexibility in their design with may or may not cause material variability in annual distributions.

Also, what purpose do you think spliting your IRA does? As far as any calculation goes, I believe the IRA adds them together. They do when calculating how much of IRA withdrawls relate to before and after tax contributions when you've made both. I see no reason why SEPPs should be different.

This is not true. SEPPs are an account based determination, not a taxpayer based computation such that many people have multiple SEPP programs each based on different IRAs and each using different assumptions, start dates, etc.

Your reference about before-tax & after-tax contributions is partially true in that when withdrawing from any IRA at any date under any circumstances; one does need to know both components because the former are taxed whereas the later are not.

TheBadger




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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54496 of 121598
Subject: Re: 72(t)(2)(A)(iv) SEPP Date: 10/9/2001 8:41 PM
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TheBadger:

<<<<The 72T process for early withdrawl from IRA's is a bit sketchy. If I establish a withdrawl (SEPP) from one IRA now, can I repeat the process in another IRA in 2-3 years? I am already planning to split the IRA I have into 2 smaller IRA's to facilitate the SEPP. I am 55 and am required to withdraw for the 5 year period. My concern is how to adjust my income if I miscalculate now or if conditions indicate that I need more money 2-3 years from now. I have been told by 2 brokers with the same firm 2 different answers, yes and no. I have not been able to find anyone on the web who has addressed this question.>>>>

"The answer to your basoc question is "YES"; in fact your tactical planning options are probably broader than you suspect in this regard. I suggest the you visit the Retire Early Home Page board here at the Fool and search under "SEPP" or "72t". This will give you a basic understanding of the details. Form more detail, I would suggest that you visit: http://www.retireearlyhomepage.com/ & take a look at report #3."

TheBadger is too modest, but he is one of the acknowledged experts posting on the Retire Early board. I am glad to see that he responded here.

Regards, JAFO




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Author: Charlie48K Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54499 of 121598
Subject: Re: 72(t)(2)(A)(iv) SEPP Date: 10/9/2001 11:48 PM
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Your reference about before-tax & after-tax contributions is partially true in that when withdrawing from any IRA at any date under any circumstances; one does need to know both components because the former are taxed whereas the later are not.

OK. Thanks for the correction. Do you have a citation or something I can use for reference to get better educated on the whole issue?



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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54503 of 121598
Subject: Re: 72(t)(2)(A)(iv) SEPP Date: 10/10/2001 9:25 AM
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OK. Thanks for the correction. Do you have a citation or something I can use for reference to get better educated on the whole issue?

This all starts with the basic concept that no economic event is ever double income taxed to the same entity. Invariably, the way the IRC handles this to compute a taxpayers "basis" or "investment" in an asset or contract & only taxes the excess over the basis as ordinary income or capital gain as the case may be.

In this particular case the language is found in §72(b) which says in part: "gross income does not include that part of any amount received as an annuity...which bears the same ratio to such amount as [the taxpayers] investment in the contract...". There is that word again, "investment", which in this case is equal to the cummulative after tax contributions; say into a 401(k) plan or after-tax contributions to an IRA account. Then, IRC §72(t) says in part: "[taxpayers tax] shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income." Simply, §72(t) is coordinated with §72(b) by saying you will be taxed and surtaxed on amounts withdrawn, but only to the extent that under §72(b) some or all of the transaction amount is determined to be taxable income; conversely, if the amount is determined to not be includible in gross income then §72(t) does not apply.

TheBadger






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Author: Charlie48K Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54504 of 121598
Subject: Re: 72(t)(2)(A)(iv) SEPP Date: 10/10/2001 10:09 AM
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In this particular case the language is found in §72(b) which says in part: "gross income does not include that part of any amount received as an annuity...which bears the same ratio to such amount as [the taxpayers] investment in the contract...". There is that word again, "investment", which in this case is equal to the cummulative after tax contributions; say into a 401(k) plan or after-tax contributions to an IRA account. Then, IRC §72(t) says in part: "[taxpayers tax] shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income." Simply, §72(t) is coordinated with §72(b) by saying you will be taxed and surtaxed on amounts withdrawn, but only to the extent that under §72(b) some or all of the transaction amount is determined to be taxable income; conversely, if the amount is determined to not be includible in gross income then §72(t) does not apply.

OK. I think I have it. Since I plan to retire in 2 yrs at 55. I have two IRAs with a total of 33% after tax pricipal contributions. I could take one of the IRAs and begin substantially equal payments using the 33% basis from both. Congress really gives the IRS simple rule to work with don't they. Thanks a lot for your help.

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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54507 of 121598
Subject: Re: 72(t)(2)(A)(iv) SEPP Date: 10/10/2001 10:30 AM
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OK. I think I have it. Since I plan to retire in 2 yrs at 55. I have two IRAs with a total of 33% after tax pricipal contributions. I could take one of the IRAs and begin substantially equal payments using the 33% basis from both. Congress really gives the IRS simple rule to work with don't they. Thanks a lot for your help.

Not quite, I think, being a little uncertain of your real fact set. Having an IRA or group of IRAs with 33% representing after-tax contributions is not impossible but would be incredibly high.

Let's assume you pick one of the IRAs to commence SEPPs which has a balance of $250,000 of which $25,000 constitutes after-tax contributions; the remaining $225,000 was either before-tax contributions, employer contributions or accumulated earnings. Further, you decide to take $25,000 per year from this IRA. Using these facts, 90% would be taxed & 10% would be tax-free or $22,500 and $2,500 respectively.

TheBadger


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Author: Charlie48K Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54508 of 121598
Subject: Re: 72(t)(2)(A)(iv) SEPP Date: 10/10/2001 11:42 AM
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Not quite, I think, being a little uncertain of your real fact set. Having an IRA or group of IRAs with 33% representing after-tax contributions is not impossible but would be incredibly high.

Unfortunately, that's what happens when you contribute over 25 years and put it in a guaranteed interest account and finally move it to mutual funds in 97 which get hammered. It's 30.1% from non-deductible contributions from my Form 8606 and current market values. I don't like it either. Thankfully, the IRA was where I had my more speculative stuff and I have a lot more in a 457 plan which was much more conservatively invested.

Let's assume you pick one of the IRAs to commence SEPPs which has a balance of $250,000 of which $25,000 constitutes after-tax contributions; the remaining $225,000 was either before-tax contributions, employer contributions or accumulated earnings. Further, you decide to take $25,000 per year from this IRA. Using these facts, 90% would be taxed & 10% would be tax-free or $22,500 and $2,500 respectively.

The contributions were all in one account and subsequently split when I moved from an annuity contract to mutual funds. So I assume I allocate the non-deductible contributions at the time of the split and then which conribution went to which mutual after that. I'm familar with the contribution you showed. Just not clear on the allocation of the non-deductible contribution.

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