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Author: ttjasi Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 741423  
Subject: SEPP LANDMINE! Date: 1/19/2000 5:29 AM
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Hello all:

I recently read a court decision on the web about a
man who received his first SEPP distribution in Decemberof 1989 and four subsequent distributions in
January of each of the following years. No problem.

THE LANDMINE! Figuring he had met the SEPP 5 year requirement and now, at 59 1/2, was age qualified to
make whatever withdrawls he wanted, he took a 6th
withdrawl in November 1993 and got
hit with a 10% penalty on all his SEPP withdrawls by the IRS.

The IRS reasoned that he had violated the SEPP rules
because the 6th withdrawl occurred WITHIN the five years. They calculated the five years as BEGINNING WITH THE DATE OF THE FIRST WITHDRAWL AND ONLY ENDING 60 MONTHS LATER. According to them he was not eligible
to take an "age eligible withdrawl" until December of 1994. Even though he had made 5 withdrawls in each of five calendar years, they were actually made within a period of of only 37 months. According to the IRS he should have waited until AFTER the date in December of
1994 that marked 5 full years from the date of the first distribution.

I would conclude from this that the IRS formula would
apply at whatever age you started withdrawls and further conclude that turning 59 1/2 after beginning
SEPP withdrawls does not automatically mean you can withdraw money from an IRA without possibly getting
slapped with a penalty.

The easiest way to find the source of my information is to go to www.google.com and in search type:

VIII Excise taxes on distrubutions

ttjasi
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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: 2311 of 741423
Subject: Re: SEPP LANDMINE! Date: 1/19/2000 9:39 AM
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This is the Arnold case which was discussed earlier here. Most think the IRS was punatitve & unfair. However, the specific language of the law is:

"before the close of the 5-year period beginning with the date of the first payment..."

Unfortunately this is pretty specific language particularly the "date of first payment". Note that it does not say "year of first payment".

Further, this is statutory language; e.g. legislated by Congress as opposed to some rule or reg. published by the IRS. As a result the IRS has little choice but to take a literal read of the law & enforce it.

TheBadger


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Author: ttjasi Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2319 of 741423
Subject: Re: SEPP LANDMINE! Date: 1/19/2000 11:23 AM
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Thanks for the update and perhaps you can answer the
following:

If a SEPP begins say 7 years before you turn 59 1/2, does that mean that you have to go a full 84 months from the date of the first payment before taking an age eligible distribution? Or can you begin as long as you have completed the five
full years plus whatever years, months and days it takes to reach 59 1/2?

Thanks, ttjasi

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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: 2321 of 741423
Subject: Re: SEPP LANDMINE! Date: 1/19/2000 11:47 AM
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If a SEPP begins say 7 years before you turn 59 1/2, does that mean that you have to go a full 84 months from the date of the first payment before taking an age eligible distribution? Or can you begin as long as you have completed the five full years plus whatever years, months and days it takes to reach 59 1/2?

I am not sure I precisely understand your question or the potential different interpretations; nonetheless here goes.

There is no absolute direct guidance on your specific question. However, reading between the lines by just a little bit, the right answer, IMHO is:

Think of §72(t)(4)(A) a two part test which never influence each other. Test one is that actual SEPP withdrawals must span 5 years (computed as 5 * 365 + leap days), irrespective of which tax years the withdrawals fall in.

Test two is to increase/decrease, e.g. modify the withdrawal from the SEPP amount; you must have actually reached the real, physical age of 59 1/2, e.g. literally 183 days after your 59th birthday.

Please note that this is a different interpretation than what you will find in Notice 87-13 wherein a taxpayer is considered to have reached age 55 on any day in the calendar year in which he reaches his 55th birthday. Notice 87-13 is more liberal & applies to §72(t)(2)(A)(v) where some clarification was needed. Conversely, §72(t)(2)(A)(iv) & §72(t)(4)(A)(ii)(I) & (I) are a bit more explicit. Others might disagree with me; however, I would never take the chance of violating the literal rule of 59th birthday plus 183 days; particularly after the Arnold case where the Service has made it clear that they read the IRC literally when there is an IRC to read; as opposed to making interpretative rules when the IRC itself might be silent or vague on a tactical issue.


TheBadger


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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2322 of 741423
Subject: Re: SEPP LANDMINE! Date: 1/19/2000 11:50 AM
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ttjasi asks,

If a SEPP begins say 7 years before you turn 59 1/2, does that mean that you have to go a full 84 months from the date of the first payment before taking an age eligible distribution? Or can you begin as long as you have completed the five
full years plus whatever years, months and days it takes to reach 59 1/2?


If you started SEPP seven years ago, you would already have cleared the "five years plus 1 day since your first SEPP withdrawal" hurdle. You could begin taking "unlimited" IRA withdrawals on the day AFTER you turn age 59 1/2.

intercst



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Author: ttjasi Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2382 of 741423
Subject: Re: SEPP LANDMINE! Date: 1/20/2000 9:16 PM
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Just a quick note to thank Badger and intercst for the
informative replies to my original question(s).

If my understanding is correct, once the 5 full calendar year requirement has been met an individual who started withdrawls 7 years before 59 1/2 would not have to wait for the 7th and last year from the actual date of the first withdrawl to complete its 12 month course before making an 8th withdrawl at age 59 1/2.

Where as in the Arnold case five years had to be 60
months before a 6th withdrawl, a 7 year commitment does
not mean 84 months before an 8th withdrawl.


Thanks, ttjasi

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2384 of 741423
Subject: Re: SEPP LANDMINE! Date: 1/20/2000 9:30 PM
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ttjasi asks,

If my understanding is correct, once the 5 full calendar year requirement has been met an individual who started withdrawls 7 years before 59 1/2 would not have to wait for the 7th and last year from the actual date of the first withdrawl to complete its 12 month course before making an 8th withdrawl at age 59 1/2.

Where as in the Arnold case five years had to be 60
months before a 6th withdrawl, a 7 year commitment does
not mean 84 months before an 8th withdrawl.


That's correct. If you complete the "5 years + 1 day from the first SEPP distribution" before age 59.5 you can withdraw as much as you want from your IRA on the day after you turn age 59.5. If you are already past 59.5, you don't have to wait "84 months before an 8th withdrawal."

intercst




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Author: ttjasi Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2386 of 741423
Subject: Re: SEPP LANDMINE! Date: 1/20/2000 9:45 PM
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Thanks again......I'm just starting, my first withdrawl is scheduled for next week! Will treat my son and daughter to dinner and shopping at their favorite mall to celebrate.

ttjasi

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