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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: of 76420  
Subject: Re: IRA Distribution Penalty Exception Date: 6/24/2000 10:15 AM
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Portions of what "intercst" says are true but not entirely accurate. However, putting that aside, "intercst" misses the biggest risk of all because we entertain or understand the word differently.

Life, in general, is volatile both on the up side and sometimes unfortunately on the down side. Further, one's life for the next 10 years is likely to be financially volatile implying that one's financial needs can easily go up and down over a 10 year year period.

SEPP's using §72(t)(2)(A)(iv) require allocating an asset base (IRA's, 401(k)'s & other deferred accounts) to the program & then applying one of three methods to the asset base to arrive at a fixed annual withdrawal. Then depending on the method selected & tax[ayer elections, the annual withdrawal amount may or may not change in each subsequent year.

However, the key issue here is the allocation of an asset base. Once the assets are allocated or pledged to the process, they are tied up and can not be used for other purposes; thus the biggest risk of all is that one may pledge his or her assets to a SEPP program abd then subsequently want or need those same assets for another purpose and arrive in a financially more riunious situation.

As an example, you have $1,000,000 in an IRA, you are age 50 & need or want $30,000 per year. As a result, you select the minimum or life expectancy method. Table I, pub 590 tells us that the divisor for a 50 year old is 33.1 & $1,000,000 divided by 33.1 is convienently $30,211. Further, you continue this process to age 55 with gradually increasing withdrawals in the $34,000 range. At age 56, a major financial emergency strikes requiring $100,000 and your only source of funding is the IRA. You withdraw an additional $100,000 for your IRA to satisfy the emergency. The cost of doing so is to disqualify all prior withdrawals and the $100k such that approximately $35,000 in penalties are due.

Plan #2 --- split the $1,000,000 into two IRA's; A with $450,000 and B with $550,000. Adopt the amortization method on IRA A using 6% and a 33.1 year life expectancy. This then yields $31,600 per year from IRA A --- a pretty convienent starting number while leaving IRA B untouched. The same financial emergency arises in year 6 and you make the $100,000 withdrawal from IRA B; not IRA A. Additional taxes and penalties due are $10,000; $25,000 less than plan A above.

In terms of attempting to match assets to programs & dealing with the volatilitiy of life (volatility = risk) plan #2 above is far superior than plan #1 by keeping some dry powder on the side while potentially being a little more aggressive (not necessarily more risky) in method adoption on the smaller IRA A.

TheBadger


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