Leaving funds in TSP and taking 72t withdrawals

[Guest2]

Gary: "squalebear, he's not talking about doing a rollover"

It would appear that my question was untimely. I certainly wasn't asking
the question on Clesters behalf, I was asking for me ! Looks like I stepped
into the middle of a pissing match.

Sorry for the interuption.

Are both sides ready,,,,,,,fire when ready !

I'm gone !

 

[RAE]

Let's forget about the LEO and ATC for a minute, and just use a federal worker. If a person retires the year in which he turns 55, he can take out equal monthly distributions of his choice changed once a year without the penalty. He can also take an annunity or a payment based on IRS life expectancy. Go to tsp.gov under civilian features on how taxes are treated.

That's correct, but Clester is talking about fed. employees who retire BEFORE reaching age 55 (as I plan to do also, and I'm not LEO or ATC, but plan to retire at age 54 under an early-out). For us, the option exists to take PENALTY-FREE withdrawals from our TSP accounts, using the life expectancy method of computing substantially-equal periodic payments (SEPP). There are several IRS-recognized methods for computing these SEPP's, but the life expectancy method is the one used by TSP. Once these payments start, they must continue for at least 5 years or until you reach age 59.5, whichever is longer. At that time, however, you can change the monthly payment amount to whatever you want, you don't need to continue with the TSP-computed life expectancy amount. You can change this amount once per year after that, according to the TSP rules.

 

[GarySpicuzza]

So where is the misunderstanding here??

There isn't any misunderstanding. I think it's more a case of message board miscommunication. The example from the IRS below uses a 50 year old.

I agree you can take a penalty free withdraw at age 55 and I also agree there are hardship exceptions to the 10% penalty free withdrawals taken prior to age 59.5 and I also agree you can amortize and/or annuitize over your life expectancy prior to age 59.5.

Agreed.

What I haven't been able to successfully communicate yet is the IRREVOCABLE OPTION that one must take to escape the penalty.

You must trade the account value for the income stream.

That is the point I'm trying to make.

Yes, yes, yes yes, yes YOU CAN escape the penalty by way of systematically liquidating the cash as described below, but you can't start an amoritization/annuitization method at age 50, take payments for 3 years, then stop, for two years, then withdraw $75,000 to buy an RV then wait till 59.5 and NOT pay the penalty for the payments taken.

I'm NOT argueing one can't escape the 10% penalty PRIOR to age 59.5.
I'm saying there are lifetime strings attached in doing so and it's not an "informal" withdrawal request that's made.

Below is from THIS link.

How are annual, substantially equal periodic payments determined for purposes of the required minimum distribution method, the fixed amortization method and the fixed annuity method?

An example of the required distribution method, an example of the fixed amortization method and an example of the fixed annuity method using the methodologies described in Rev. Rul. 2002-62 are set forth.

Facts:
Mr. B is the owner of an IRA from which he would like to start taking distributions beginning in 2003. Mr. B will celebrate his 50th birthday in January 2003. Mr. B would like to avoid the additional 10% tax imposed on early distributions under section 72(t)(1) by taking advantage of the exception in section 72(t)(2)(A)(iv) for distributions in the form of substantially equal periodic payments.




Assumptions:

• the account balance of Mr. B’s IRA is $400,000 as of December 31, 2002, and this is the account balance (and, when applicable, the date as of which the account balance is determined) used to calculate distributions.
• 120% of the federal mid-term rate for the appropriate month is assumed to be 4.5% and, when applicable, this is the interest rate that will be used for calculations.
• distributions will be over Mr. B’s life only and, where applicable, single life expectancy will be used for calculations.

1. Required minimum distribution method

For 2003, the annual distribution amount ($11,695.91) is calculated by dividing the December 31, 2002, account balance ($400,000) by the single life expectancy (34.2) obtained from Q&A-1 of § 1.401(a)(9)-9 of the Income Tax Regulations when an age of 50 is used.

$400,000/34.2 = $11,695.91
For subsequent years, the annual distribution amount will be calculated by dividing the account balance as of December 31 of the prior year by the single life expectancy obtained from the same single life expectancy table using the age attained in the year for which distributions are calculated. For example, if Mr. B's IRA account balance, after the 2003 distribution has been paid, is $408,304 on December 31, 2003, the annual distribution amount for 2004 ($12,261.38) is calculated by dividing the December 31, 2003 account balance ($408,304) by the single life expectancy (33.3) obtained from Q&A-1 of § 1.401(a)(9)-9 of the Income Tax Regulations when an age of 51 is used.
$408,304/33.3 = $12,261.38
​

2. Fixed amortization method

For 2003, the annual distribution amount will be calculated by amortizing the account balance ($400,000) over a number of years equal to Mr. B’s single life expectancy (34.2) (obtained from Q&A-1 of § 1.401(a)(9)-9 of the Income Tax Regulations when an age of 50 is used), at a rate of interest equal to 4.5%. If an end-of-year payment is calculated, then the annual distribution amount in 2003 is $23,134.27. Once an annual distribution amount is calculated under this fixed method, the same amount will be distributed under this method in subsequent years.
​

3. Fixed annuitization method

Under this method the annual distribution amount for 2003 is equal to the account balance ($400,000) divided by the cost of an annuity factor that would provide one dollar per year over Mr. B’s life, beginning at age 50 (i.e., the actuarial present value of an annuity of one dollar a year payable for the life of a 50 year old). The age 50 annuity factor (17.462) is calculated based on the mortality table in Appendix B of Rev. Rul. 2002-62 and an interest rate of 4.5%. Such calculations would normally be made by an actuary.
The annual distribution amount is calculated as

$400,000/17.462 = $22,906.88
​

Once an annual distribution amount is calculated under this fixed method, the same amount will be distributed under this method in subsequent years.
​

What is an example of a one-time change from a fixed amortization method to the required minimum distribution method?
Facts and Assumptions:

Mr. S started receiving distributions from his IRA in the form of annual substantially equal periodic payments in 1998 at age 50. His annual payment ($97,258) had been originally calculated using the amortization methodology, with the same amount distributed each year. Following a steep decline in his IRA account balance from $1,400,000 in 1998 to $750,000 in 2002, Mr. S would like to use the special rule allowing a one-time change to the required minimum distribution method provided in section 2.03(b) of Rev. Rul. 2002-62 to determine a new annual distribution amount for 2002. For this one-time change in method, Mr. S will determine an annual distribution amount for 2002 using his IRA account balance on September 30, 2002 ($750,000), and a single life expectancy of 30.5 (obtained from Q&A-1 of § 1.401(a)(9)-9 of the Income Tax Regulations when an age of 54 is used).

Under the new method, the annual distribution amount for 2002 is $24,590.16 ($750,000/30.5). Mr. S must use the required minimum distribution method to determine the annual distribution amount for subsequent years.

 

[RAE]

There isn't any misunderstanding. I think it's more a case of message board miscommunication. The example from the IRS below uses a 50 year old.

I agree you can take a penalty free withdraw at age 55 and I also agree there are hardship exceptions to the 10% penalty free withdrawals taken prior to age 59.5 and I also agree you can amortize and/or annuitize over your life expectancy prior to age 59.5.

Agreed.

What I haven't been able to successfully communicate yet is the IRREVOCABLE OPTION that one must take to escape the penalty.

You must trade the account value for the income stream.

That is the point I'm trying to make.

Yes, yes, yes yes, yes YOU CAN escape the penalty by way of systematically liquidating the cash as described below, but you can't start an amoritization/annuitization method at age 50, take payments for 3 years, then stop, for two years, then withdraw $75,000 to buy an RV then wait till 59.5 and NOT pay the penalty for the payments taken.

I'm NOT argueing one can't escape the 10% penalty PRIOR to age 59.5.
I'm saying there are lifetime strings attached in doing so and it's not an "informal" withdrawal request that's made.
____________________________________________________________

OK, let's try this again. First of all, both Clester and I have stated that once you elect to receive SEPP payments from your TSP prior to age 55, you must continue those payments (calculated by TSP, using the life expectancy method) for 5 years, or until age 59.5, whichever is longer. So, you are correct, you can't retire at 50, take the payments for 3 years, then withdraw $75,000 to by an RV......but we never suggested that you could! Do you agree that it is possible to begin taking penalty-free monthly payments from a TSP account prior to age 55, using the life expectancy payment method described on the tsp.gov website, and continue receiving those payments through age 59.5? If not, please tell us why you do not believe this is possible!

I think part of our misunderstanding comes from your use of the terms "irrevocable", and "annuitization" of your TSP account. What I have said is that if you retire as a federal employee prior to age 55, you can use the life expectancy method to get penalty-free monthly payments from your TSP account, using the life expectancy method. After you reach 59.5, you can CHANGE the monthly amount you receive to any amount you desire each month. So, your decision to take the life expectancy payments when you first retired is NOT exactly irrevocable, in the sense that you can make changes to the payments after you reach 59.5. You might not be able to withdraw the remainder of your TSP balance as a lump-sum, but the fact that you can change the monthly payment amounts to whatever you desire at age 59.5 certainly gives you a lot of flexibility. Also, the fact that you can make these changes at age 59.5 makes it quite different from purchasing an annuity, which would allow no flexibility in the monthly payment schedule you originally agreed to, for the life of the contract.

So, your statement that "you must trade the account value for the income stream" is misleading, because it makes it sound as if you have purchased an annuity, when you have not. This is quite different than an annuity, because the balance of your account does not transfer to an insurance company upon your death. You can receive whatever monthly payments you want from the account while you are alive (from age 59.5 on), and upon your death, the balance of the account would transfer to your beneficiary.

Please read what I have said closely and let me know if anything I have said is factually incorrect! thanks.

 

[GarySpicuzza]

Hi Rae,

This is a great topic!

And an extemely misunderstood topic if one is wanting to take an income stream from a qualified or non-qualified pension plan PRIOR to age 59 1/2.

I'm glad words such as IRREVOCABLE or ANNUITIZATION got your attention.

I'm going to try to intelligently answer all of your concerns:

First of all, both Clester and I have stated that once you elect to receive SEPP payments from your TSP prior to age 55, you must continue those payments (calculated by TSP, using the life expectancy method) for 5 years, or until age 59.5, whichever is longer.

No.

You must continue those payments as orginally calculated using the Amoritization or Annuitization method for the rest of your life IF you want to escape the 10% penalty for ALL distributions made prior to age 59 1/2.

Age 59 1/2 is NOT a "get out of jail free card."

Do you agree that it is possible to begin taking penalty-free monthly payments from a TSP account prior to age 55, using the life expectancy payment method described on the tsp.gov website, and continue receiving those payments through age 59.5?

Yes.

As long as you continue to take the payments as originally calculated with the ONLY exception being the one time change to the Minimum Distribution method.

I think part of our misunderstanding comes from your use of the terms "irrevocable", and "annuitization" of your TSP account.

Purposeful strong language aimed at getting your attention. Also correct.
If you annuitize your TSP account that is an IRREVOCABLE option.

What I have said is that if you retire as a federal employee prior to age 55, you can use the life expectancy method to get penalty-free monthly payments from your TSP account, using the life expectancy method. After you reach 59.5, you can CHANGE the monthly amount you receive to any amount you desire each month.

Yes and No.

No. Absolutely NOT. You can make one (1) change, one time. The exception being the one time change to the Minimum Distribution method.

Yes. Let's be crystal clear.

Just because you can change, stop, increase, decrease, take a lump sum from TSP that DOES NOT mean you escape the 10% penalty for distributions made prior to 59 1/2. You just violated IRS Code Section 72(t)(2)(A)(iv).

Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in section 72(t)(1) will not be applicable.

Where does it say above you can make whatever changes you want once you attain age 59 1/2?

After you reach 59.5, you can CHANGE the monthly amount you receive to any amount you desire each month. So, your decision to take the life expectancy payments when you first retired is NOT exactly irrevocable, in the sense that you can make changes to the payments after you reach 59.5. You might not be able to withdraw the remainder of your TSP balance as a lump-sum, but the fact that you can change the monthly payment amounts to whatever you desire at age 59.5 certainly gives you a lot of flexibility.

No. See answer above. What's being misunderstood here is that YES YOU CAN but you'll pay the 10% penalty for ALL payments made prior to age 59 1/2 IF YOU DO.

Where does it say above you can make whatever changes you want once you attain age 59 1/2?

Also, the fact that you can make these changes at age 59.5 makes it quite different from purchasing an annuity, which would allow no flexibility in the monthly payment schedule you originally agreed to, for the life of the contract.

False. False. False.

Purchasing an annuity and ANNUITIZING an annuity are two separate issues. ONLY if and when you annuitize an annuity would that allow no flexibility in the monthly payment schedule you originally agreed.

99% of ALL annuities ARE NOT annuitized.

So, your statement that "you must trade the account value for the income stream" is misleading, because it makes it sound as if you have purchased an annuity, when you have not.

Perhaps not perfectly worded but not misleading if one's goal is to take an income stream from a pension plan prior to age 59 1/2 and PEMANENTLY escape the 10% penalty.

This is quite different than an annuity, because the balance of your account does not transfer to an insurance company upon your death.

This statement is absolutely FALSE.
The named beneficiary receives the account value upon your death.

That statemant would only be true IF one elected the the "LIFE ONLY" settlement option. NOBODY elects that option and 99% of all annuitites ARE NOT ANNUITIZED.

You can receive whatever monthly payments you want from the account while you are alive (from age 59.5 on), and upon your death, the balance of the account would transfer to your beneficiary.

True, as long as you didn't take any distributions PRIOR to age 59 1/2.

If you do, and make any changes to the income stream payments other than the one time change to the Minimum Distribution method YOU WILL suffer the 10% penalty for all distributions made PRIOR to age 59 1/2.

Please read THIS link carefully.

RED, emphasis added.

IRS Notice 89-25, Q & A #12 ​

Q-12: In the case of an IRA or individual account plan, what constitutes a series of substantially equal periodic payments for purposes of section 72(t)(2)(A)(iv)?
​

A-12: Section 72(t)(1) imposes an additional tax of 10 percent on the portion of early distributions from qualified retirement plans (including IRAs) includible in gross income. However, section 72(t)(2)(A)(iv) provides that this tax shall not apply to distributions which are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of the employee and beneficiary. Section 72(t)(4) provides that, if the series of periodic payments is subsequently modified within five years of the date of the first payment, or, if later, age 59-1/2, the exception to the l0 percent tax under section 72(t)(2)(A)(iv) does not apply, and the taxpayer's tax for the year of modification shall be increased by an amount, determined under regulations, which (but for the 72(t)(2)(A)(iv) exception) would have been imposed, plus interest.

​

Best regards.

Great thread AND I actually hope I'm WRONG!

 

[clester]

Gary - you're wrong, or you are not understanding what Clester is saying. I copied and pasted this paragraph from the first link you posted earlier today:

You may qualify to take a penalty-free withdrawal if you meet one of the
following exceptions:
You become totally disabled.
You are in debt for medical expenses that exceed 7.5 percent of
your adjusted gross income.
You are required by court order to give the money to your divorced
spouse, a child, or a dependent.
You are separated from service (through permanent layoff,
termination, quitting or taking early retirement) in the year you
turn 55, or later.
You are separated from service and you have set up a payment
schedule to withdraw money in substantially equal amounts over the
course of your life expectancy. (Once you begin taking this kind
of distribution you are required to continue for five years or
until you reach age 59 1/2, whichever is longer.)

Note that the last item above is exactly what Clester is talking about - taking penalty-free withdrawals using the life expectancy method (as he said, thousands of people are doing this as we speak). You can do this from an IRA, and you can do it from your TSP account also.

If you don't believe that, here is a quote from Ed Zurndorfer, moderator over at federalsoup.com:

"There are two ways that a pre-age 55 Federal annuitant may receive
penalty-free (no 10% early withdrawal IRS penalty) TSP distributions.
One way is monthly withdrawals based on life expectancy (the monthly amount is recomputed each year) and the other way is through the purchase of a TSP annuity.

Also, the tsp.gov website provides instructions on how to set up penalty-free withdrawals from a TSP account using the life expectancy method, and even provides a calculator on what the monthly payments will be.

So where is the misunderstanding here??

Exactly. What I'm interested in is comments on whether or not you can use the 72t amoritization method to compute the monthly payments and request payments in that amount (as monthly payments option) and not use the life expectancy (min. dist. method) that the TSP computes. I think you can.

 

[clester]

Thanks RAE,
It's sound exactly like what I'm proposing.

The statement "Once you complete the required SEPP you can continue the payments or withdraw your balance and roll it over to an IRA where you will have the
freedom to withdraw your money as you wish."

seems clear enough. It seems to me you complete the SEPP at 59 1/2 and then you can do as you wish with the money.

 

[clester]

Seems this answers the question in our favor. You only lose the exemption if you modify it before age 591/2. Therefore, you can modify it after age 59.5
​

IRS Notice 89-25, Q & A #12 ​

Q-12: In the case of an IRA or individual account plan, what constitutes a series of substantially equal periodic payments for purposes of section 72(t)(2)(A)(iv)?
​

A-12: Section 72(t)(1) imposes an additional tax of 10 percent on the portion of early distributions from qualified retirement plans (including IRAs) includible in gross income. However, section 72(t)(2)(A)(iv) provides that this tax shall not apply to distributions which are part of a series of substantially equal periodic payments (not less frequently than annually)made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of the employee and beneficiary. Section 72(t)(4) provides that, if the series of periodic payments is subsequently modified within five years of the date of the first payment, or, if later, age 59-1/2, the exception to the l0 percent tax under section 72(t)(2)(A)(iv) does not apply, and the taxpayer's tax for the year of modification shall be increased by an amount, determined under regulations, which (but for the 72(t)(2)(A)(iv) exception) would have been imposed, plus interest.

 

[clester]

From the www.72t.net forum, which has professionals posting regularly.


what happens after 59.5 and 5 years has been met. One poster says it is irrevocable and you lose access to your money (you have to keep SEPP for life) and others (like me) say you can do whatever you want with your money after that.

Message Replies
By: Gfw
Date: 4/30/2008
Subject: what happens after 59.5
Short answer is that you are right and they are wrong. By definition, the SEPP ends at the later of 5 years or age 59.5. Between 59.5 and 70.5 you can pretty much do what you want. At age 70.5, the Minimum Distribution Rules come into play.
Moral of the Story... tell them to post their questions on this site - they may actually get the right answers. 8754Edit
By: keani
Date: 4/30/2008
Subject: what happens after 59.5
are you just taxed regular income tax or additional tax. 8755Edit
By: Gfw
Date: 4/30/2008
Subject: what happens after 59.5
After meeting the 5 year and 59.5 rule and prior to age 70.5, any distributions are taxable as ordinary income. The are no distribution penalties between 59.5 and 70.5 8756Edit
By: dlzallestaxes
Date: 4/30/2008
Subject: what happens after 59.5
I am a CPA, and I participate in 3 list-serves of accountants. I'll bet that the list-serve you referenced was one of accountants, and possibly EAs (Enrolled Agents). Before I found this site, I knew nothing about SEPP 72-Ts. Now I do presentations to practitioners about them. From the reactions and questions in those seminars, and very occasional questions on those list-serves, I know that 99% of all tax preparers know -0- about SEPP 72-Ts. 8757Edit

 

[GarySpicuzza]

See exact
Rev. Rul. 2002-62

Clester above is the EXACT IRS Rev. Rul. 2002-62.

I'm going to quote excerpts and then ask how anyone could interpret those provisions to purport an age 59.5 "do whatever you want."

First it says:

(b) Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in § 72(t)(1) will not be applicable.

That says:

..."if distributions are part of a series of substantially equal periodic payments made for the life of the employee"...the tax described in § 72(t)(1) will not be applicable.

It says, for the life of the employee, It DOES NOT say, for the life of the employee or for a minimum of 5 years or until age 59.5 whichever is longer AND between age 59.5 and 70.5 you can do whatever you want.

Does it?

It goes on to say:

(c) Section 72(t)(4) provides that if the series of substantially equal periodic payments that is otherwise excepted from the 10-percent tax is subsequently modified (other than by reason of death or disability) within a 5-year period beginning on the date of the first payment, or, if later, age 59½, the exception to the 10-percent tax does not apply, and the taxpayer’s tax for the year of modification shall be increased by an amount which, but for the exception, would have been imposed, plus interest for the deferral period.

It says:

...if the series of substantially equal periodic payments that is otherwise excepted from the 10-percent tax is subsequently modified within a 5-year period beginning on the date of the first payment, or, if later, age 59 1/2, the exception to the 10-percent tax does not apply,...

This means if you modify the payments within 5 years you are going to get slapped with the penalty, or, if later, age 59 1/2...that means even though you are past the age of 59 1/2 whereby the penalty would no longer be applicable you are going to get slapped with the penalty BECAUSE you did NOT take the "distributions as part of a series of substantially equal periodic payments made for the life of the employee, the one time EXCEPTION would be after you have satisfied the 5 year period you can change to the required minmium distribution method.

Please show me where I've gone wrong?

The 5 year requirement means you are stuck for a minimum of 5 years before you can make the one and only change to the RMD.

If your interpretation is correct that would mean someone could, at age 56, amortize payments for ten years to age 66, but at age 61, since he's taken payments for 5 years AND is past age 59.5 could stop payments altogether, then go back to work and contribute to his IRA until age 70.5, then only take his RMD and basically get about 40% of his retirement paid to him prior to age 59.5 penalty FREE.

How does what I just described above jive with:

(b) Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in § 72(t)(1) will not be applicable.



By the way, if I'm wrong, my client suffers no adverse consequences, if you're wrong the IRS is going to spank you for the 10% penalty plus interest for all payment made prior to age 59.5.

 

[clester]

I think what's confusing you is that the payments are calculated on the life expectancy tables, not that you have to take take those payments forever.

(c) Section 72(t)(4) provides that if the series of substantially equal periodic payments that is otherwise excepted from the 10-percent tax is subsequently modified (other than by reason of death or disability) within a 5-year period beginning on the date of the first payment, or, if later, age 59½, the exception to the 10-percent tax does not apply, and the taxpayer’s tax for the year of modification shall be increased by an amount which, but for the exception, would have been imposed, plus interest for the
deferral period.

It doesn't say at "any time you modify it." Only if , in my case before 59.5

 

[clester]

Here is the first part of the 72t section:

72(t)(1) IMPOSITION OF ADDITIONAL TAX. --If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.

72(t)(2) SUBSECTION NOT TO APPLY TO CERTAIN DISTRIBUTIONS. --Except as provided in paragraphs (3) and (4), paragraph (1) shall not apply to any of the following distributions:

72(t)(2)(A) IN GENERAL. --Distributions which are --

72(t)(2)(A)(i) made on or after the date on which the employee attains age 591/2

 

[clester]

"If your interpretation is correct that would mean someone could, at age 56, amortize payments for ten years to age 66, but at age 61, since he's taken payments for 5 years AND is past age 59.5 could stop payments altogether, then go back to work and contribute to his IRA until age 70.5, then only take his RMD and basically get about 40% of his retirement paid to him prior to age 59.5 penalty FREE."

True, except you would have to use one of the three methods approved using life expectancy tables. 10 years would not qualify

 

[maryanddan]

I just finished listening to a podcast of the "For Your Benefit" radio show on Federal News Radio where this was discussed. The hosts are from NITP which provides the retirement planning seminars for the federal government. Sounds like you can avoid the 10% by "annuatizing" for 5 years or until 59 1/2 which ever is longer. At that point you can do whatever you want. Here's a link to the podcast: http://icestream.bonnint.net:8000/dc/fnr/fyb/!FOR_YOUR_BENEFIT_04-19-2008.mp3 They discuss this about 1/3 of the way into the show.
They provide lots of information each week on benefits and other aspects of retirement. Hope this helps.

Mary

 

[maryanddan]

If my link doesn't work, you can go to www.federalnewsradio.com and in the audio archives, it was the April 19 2008 For Your Benefits show.

Mary

 

[clester]

Thanks Mary.

Here is the section that describes change in method. I think this is clear enough. If you modify the plan before age 59 1/2 you will be liable for the 10% tax.
Wouldn't it say "if you ever modify it" you would be liable? if thats what they meant. Why would they use the age 59 1/2 if that was the case?

(4) Change in substantially equal payments
(A) In general

If - (i) paragraph (1) does not apply to a distribution by reason of paragraph (2)(A)(iv), and (this is us) (ii) the series of payments under such paragraph are subsequently modified (us) (other than by reason of death or disability) - (I) before the close of the 5-year period beginning with the date of the first payment and after the employee attains age 59 1/2 , or (II) before the employee attains age 59 1/2 , the taxpayer's tax for the 1st taxable year in which such modification occurs shall be increased by an amount, determined under regulations, equal to the tax which (but for paragraph (2)(A)(iv)) would have been imposed, plus interest for the deferral period. (B) Deferral period
For purposes of this paragraph, the term "deferral period" means the period beginning with the taxable year in which (without regard to paragraph (2)(A)(iv)) the distribution would have been includible in gross income and ending with the taxable year in which the modification described in subparagraph (A) occurs.

 

[GarySpicuzza]

Another Internet LINK with a SEPP calculator says...

There are three different life expectancy tables that the IRS allows you to use when calculating your SEPP with the "Fixed Amortization" or the "Required Minimum Distribution" methods. It is important to note that once you have chosen a distribution method and life expectancy table, you cannot change either throughout the course of your distributions. (Except for a one-time change from the Annuitized or Amortized methods to the Life Expectancy method, see SEPP definition for more details). The three life expectancy options are:

I think the red letters are pretty clear language.

But is that contradictory with the quote below from the same link?

The rules for 72(t)/(q) distributions require you to receive Substantially Equal Periodic Payments (SEPP) based on your life expectancy to avoid a 10% premature distribution penalty on any amounts you withdraw. Payments must last for five years (the five-year period does not end until the fifth anniversary of the first distribution received) or until you are 59 1/2, whichever is longer. Further, the SEPP amount must be calculated using one of the IRS approved methods which include:

No, it's not contradictory. They are talking about totally distributing ALL of your funds over a minimum 5 year period or until age 59.5 whichever is longer. This means at age 59.5 you no longer have any funds growing tax deferred and have in fact paid all the ordinary income tax on all distributions.

BECAUSE the second to last paragraph from the link above clearly states:

If payments are changed for any reason other than death or disability before the required distribution period ends, the distributions may be subject to a retroactive application of the Premature Distribution penalty. It is 10% (plus interest) for all years beginning the year such payments commenced and ending the year of the modification. If payments are changed for any reason other than death or disability before the required distribution period ends, the distributions may be subject to a retroactive application of the Premature Distribution penalty. It is 10% (plus interest) for all years beginning the year such payments commenced and ending the year of the modification. It is important to remember that while 72(t) distributions are not subject to the 10% penalty for early withdrawal, all applicable taxes on the distributions must still be paid. Further, taking any early distributions from a retirement account reduces the amount of money available later during your retirement. Please contact a qualified professional for more information.

Clester this is a great topic and one filled with landmines.

Also I understand how very difficult it is to communicated over an Internet message board as at the beginning of this thread my brain was focused on a completely separate issue than the specific issue of SEPP.

The IRS is NOT going to allow you to have it both ways. The 5 year provision is nothing more than the minimum amount of time you can distribute ALL of your funds to age 59.5 and escape the 10% penalty. That means you have paid ALL oridinary income tax on those distributions and there are no funds whatsoever accruing tax deferred.

Please provide exact IRS rulings, Tax Court case law, IRS private letter rulings or IRS code to the contrary. Not other website opinions, CPA opinions, radio talk show opinions.

Again, I'm not being argumentative I personally want to know exactly the correct information as I have enjoyed researching this topic.

It is my SAFE "opinion" that:

If you want to take SEPP prior to age 59.5 your are stuck pemanently taking those distributions. That's the "deal" for the IRS allowing you to avoid the 10% penalty for early distributions prior to age 59.5 with the ONLY exception being a one-time change from the amoritization or annuitization method to the Required Minimum Distribution method.

 

[clester]

The IRS is NOT going to allow you to have it both ways. The 5 year provision is nothing more than the minimum amount of time you can distribute ALL of your funds to age 59.5 and escape the 10% penalty. That means you have paid ALL oridinary income tax on those distributions and there are no funds whatsoever accruing tax deferred.

You cannot distribute all your fund in 5 years! or even 10 years. You have to use one of the three method using life expectancy tables

Please provide exact IRS rulings, Tax Court case law, IRS private letter rulings or IRS code to the contrary. Not other website opinions, CPA opinions, radio talk show opinions.

Do you have any to prove your point? I will look for some to prove mine.

 

[luv2read]

Gary,

It's pretty clear to me that once the SEPP period has been met, whether it be 5 years or age 59-1/2 - whichever is later, you can do what you want. Note it says "throughout the course of your distributions." This does not mean FOR LIFE. It means for the term of the SEPP. The three quotes you marked in red also back this up. It's also clear that you do not have to distribute ALL of your money, the 5-year SEPP is considered an early distribution (see the last quote underlining), hence the "required minimum distribution method." I contacted a couple of IRS auditor friends who specialize in retirement issues and are financial experts, one is a lawyer specializing in IRC. They agree. They have handled a number of these for retirees. NO, I can't give you their names.

There are three different life expectancy tables that the IRS allows you to use when calculating your SEPP with the "Fixed Amortization" or the "Required Minimum Distribution" methods. It is important to note that once you have chosen a distribution method and life expectancy table, you cannot change either throughout the course of your distributions. (Except for a one-time change from the Annuitized or Amortized methods to the Life Expectancy method, see SEPP definition for more details). The three life expectancy options are:

The rules for 72(t)/(q) distributions require you to receive Substantially Equal Periodic Payments (SEPP) based on your life expectancy to avoid a 10% premature distribution penalty on any amounts you withdraw. Payments must last for five years (the five-year period does not end until the fifth anniversary of the first distribution received) or until you are 59 1/2, whichever is longer. Further, the SEPP amount must be calculated using one of the IRS approved methods which include:

If payments are changed for any reason other than death or disability before the required distribution period ends, the distributions may be subject to a retroactive application of the Premature Distribution penalty. It is 10% (plus interest) for all years beginning the year such payments commenced and ending the year of the modification. It is important to remember that while 72(t) distributions are not subject to the 10% penalty for early withdrawal, all applicable taxes on the distributions must still be paid. Further, taking any early distributions from a retirement account reduces the amount of money available later during your retirement. Please contact a qualified professional for more information.

 

[clester]

I think Gary is as hard headed as I am. But the difference is I'm right.

Back to my real question or statement. I am ATC and want to take payments from my TSP starting at age 49. The TSP offers the life expectancy distribution (same as minimum distribution method) which will avoid the 10% penalty. Another IRS approved method is the amoritization method based on life expectancy. This method gives you quite a higher initial payment, but then you are locked in for that amount until 59 1/2 unless you want to pay the 10% penalty. Your balance will, of course be used up quicker.
Anyway, what I propose is that if you wanted the amoritization amount you could make the calculations according to the 72t rules and request monthly distributions (TSP does offer this) in that amount. You would need to file a IRS form 5329 to claim the exemption from 10% penalty. At 59 1/2 you could then adjust the amount to what you need on a yearly basis. This way you could leave funds in TSP and not have to transfer to an IRA. The money is of course still yours.

Agree or disagree?