Leaving funds in TSP and taking 72t withdrawals

[clester]

Gary, One thing to look at is the for 1099-R that the accounts custodian must file if you take distributions. If you are 59 1/2 it seems you should get a code 7 if not code 1 or 2. If you get a code one you need to file a form 5329.


7—Normal distribution. Use Code 7: (a) for a normal distribution from a plan, including a A
traditional IRA, section 401(k), or section 403(b) plan, if the employee/
taxpayer is at least age 591/2, (b) for a Roth IRA conversion or
reconversion if the participant is at least age 591/2, and (c) to report a
distribution from a life insurance, annuity, or endowment contract and
for reporting income from a failed life insurance contract under
sections 7702(g) and (h). See Rev. Rul. 91-17, 1991-1 C.B. 190. Use
Code 7 with Code A, if applicable. Generally, use Code 7 if no other
code applies. Do not use Code 7 for a Roth IRA.
Note: Code 1 must be used even if a taxpayer is 591/2 or older and he
or she modifies a series of substantially equal periodic payments
under section 72(q), (t), or (v) prior to the end of the 5-year period.

This was copied from the form 5329

Additional Tax on Early Distributions

Complete this part if you took a taxable distribution, before you reached age 591⁄2, from a qualified retirement plan (including
an IRA) or modified endowment contract (unless you are reporting this tax directly on Form 1040 or Form 1040NR—see above).
You may also have to complete this part to indicate that you qualify for an exception to the additional tax on early distributions
or for certain Roth IRA distributions (see instructions).

1 Early distributions included in income. For Roth IRA distributions, see instructions

1
Early distributions included on line 1 that are not subject to the additional tax (see instructions).
Enter the appropriate exception number from the instructions:

2
2
3
Amount subject to additional tax. Subtract line 2 from line 1

3
4 Additional tax. Enter 10% (.10) of line 3. Include this amount on Form 1040, line 60, or Form
1040NR, line 55
4Part I

 

[clester]

On line 2 of form 5329 (see instructions for form) you enter a 12 - other for the exception if your 59 1/2
Here is the excerpt from the form


Other. The following exceptions also apply.

•Distributions incorrectly indicated as
early distributions by code 1, J, or S
in box 7 of Form 1099-R. Include on line 2
the amount you received when you
were age 591/ or older.

Line 2 is where you put the amount exempt from the 10% penalty

 

[clester]

here is the instructions for form 5329

 

[GarySpicuzza]

Okay, so if I'm understanding you correctly then the three (3) methods of lifetime distribution under the SEPP exception are nothing more than a mathematical formula to determine the amount you can take to get you to age 59.5 as long as the payments are made for at least the five year period preceeding age 59.5 or longer if you were under age 56.

Did I state that correctly?

Then at age 59.5 IF you have satisfied the correct distribution amount for the method selected and for the correct time frame you can completely stop taking distributions altogether until age 70.5 at which time you are required to take only the Require Minimum Distribution?

Did I state that correctly?

Further, using THIS SEPP calculator a 50 year old, with 500K, based on 5%, single life expectancy could take...

an RMD method amount of $14,620 per year until 59.5

or

$30,807 fixed amoritization method until age 59.5

or

$30,409 fixed annuitization method until age 59.5....

then STOP all distributions at 59.5 and not restart them until age 70.5 when the usual 70.5 RMD takes effect?

Did I state that correctly?

If all of the above is correct then I must humblely submit that I have been taken to school on this thread AND.....

Thank you!

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

As my written words above confirm that was NOT and has NOT been my interpretation of the SEPP exception to the 10% penalty.

I'm now going to have to have my SAFE designation re-issued! :embarrest:

 

[luv2read]

Don't forget that age 59-1/2 you can rollover or transfer to an IRA.

 

[clester]

Okay, so if I'm understanding you correctly then the three (3) methods of lifetime distribution under the SEPP exception are nothing more than a mathematical formula to determine the amount you can take to get you to age 59.5 as long as the payments are made for at least the five year period preceeding age 59.5 or longer if you were under age 56.

Did I state that correctly?

Then at age 59.5 IF you have satisfied the correct distribution amount for the method selected and for the correct time frame you can completely stop taking distributions altogether until age 70.5 at which time you are required to take only the Require Minimum Distribution?

Did I state that correctly?

Further, using THIS SEPP calculator a 50 year old, with 500K, based on 5%, single life expectancy could take...

an RMD method amount of $14,620 per year until 59.5

or

$30,807 fixed amoritization method until age 59.5

or

$30,409 fixed annuitization method until age 59.5....

then STOP all distributions at 59.5 and not restart them until age 70.5 when the usual 70.5 RMD takes effect?

Did I state that correctly?

If all of the above is correct then I must humblely submit that I have been taken to school on this thread AND.....

Thank you!

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

As my written words above confirm that was NOT and has NOT been my interpretation of the SEPP exception to the 10% penalty.

I'm now going to have to have my SAFE designation re-issued! :embarrest:

You stated it correctly as far as I can tell. Your welcome and I didn't take it as being argumentative. It was good for me to research further also.

 

[Show-me]

You guys are COOL! I appreciate the spirited discussion and have learn a ton in this thread. Thanks!

 

[GarySpicuzza]

Clester wrote:

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

True!

I'm from Missouri so you have to "Show-Me."

Also, the cost of being wrong on this SEPP issue to age 59.5 would be SEVERE.

For ease of numbers and to understand my concern. If a 50 year old with 500k could withdraw about $14,000 using RMD method until age 60, 11 years inclusive, that would total $154,000.

Could you imagine how upset the client would be with their advisor if they got a letter from the IRS at age 61 that says, "Sorry Charlie, you stopped the payments and now you owe us an additional $15,400 in penalty PLUS interest from age 50 when you took your first withdrawal!

It was the ability to STOP taking withdrawals that I couldn't get my head around and I did my "best" to debunk that!

Sadly, in the end, but with great comfort and joy I lost an Internet thread war.
But big boyz don't cry, they get up, brush themselves off and get ready for the next battle.

Best regards,

 

[airlift]

Can you please address the scenario where a person keeps working after age 70-1/2, having continued to contribute to the TSP fund? That is, is that individual required to liquidate the TSP funds in order to take the Required Minimum Distribution (RMD) upon attaining age 70-1/2? Tia.

Don't forget that age 59-1/2 you can rollover or transfer to an IRA.

 

[SkyPilot]

Can you please address the scenario where a person keeps working after age 70-1/2, having continued to contribute to the TSP fund? That is, is that individual required to liquidate the TSP funds in order to take the Required Minimum Distribution (RMD) upon attaining age 70-1/2? Tia.

Wow, good question! It seems that you would have to take the minimum distribution while also contributing so as to receive the matching funds...

At that point, you are forgoing most (if not all) your SS benefits, while contributing to SS as well. And you are not collecting your pension (basic benefit), which by that time even a FERS employee would likely be somewhere north of 60% of their hi-3.

Time to hang it up at that point... you may be making less by working than collecting your due?

Hope we can all be done way before then!

 

[luv2read]

Wow, good question! It seems that you would have to take the minimum distribution while also contributing so as to receive the matching funds...

At that point, you are forgoing most (if not all) your SS benefits, while contributing to SS as well. And you are not collecting your pension (basic benefit), which by that time even a FERS employee would likely be somewhere north of 60% of their hi-3.

Time to hang it up at that point... you may be making less by working than collecting your due?

Hope we can all be done way before then!

Paying the government for the privilege of working for it? BAH! Not ME!:nuts:

 

[clester]

Can you please address the scenario where a person keeps working after age 70-1/2, having continued to contribute to the TSP fund? That is, is that individual required to liquidate the TSP funds in order to take the Required Minimum Distribution (RMD) upon attaining age 70-1/2? Tia.

I'm not sure, but you would have to take at least the RMD whether or not you are still working.

TSP.gov has a pamphlet (Important tax info. about TSP withdrawals and required min. dist) about the 70 1/2 RULE. It's too large to post here. I haven't researched that much since it won't affect me.

 

[airlift]

Sky, it is always nice to hear from you! Luv2read, and Clester. I want to thank all of you for your quick and pointed response. Best wishes to all.

 

[GarySpicuzza]

See THIS link.

I found the information from The CPA Journal to be very instructive.

An example of the minimum distribution method calculation follows: Assume a 50-year-old taxpayer with an IRA account balance of $2 million in 2000. Using the single life expectancy table (Table I) from Publication 590, this taxpayer is expected to live for 33.1 years; $2 million divided by 33.1 years equals $60,423. Therefore, the taxpayer must distribute $60,423 from her IRA account for 2000. Because the single life expectancy factor changes as a taxpayer gets older, the minimum distribution amount must be recalculated each year.

Section 72(t)(4)(A) Pitfalls

IRC section 72(t)(4)(A) must be followed carefully to avoid drastic penalties that would nullify the advantages to this early retirement strategy. Section 72(t)(4)(A) states that if the series of payments is subsequently modified (other than by reason of death or disability) before the end of a five-year period beginning with the date of the first payment and after the employee attains age 59 1/2, then the taxpayer is subject to the 10% penalty. The penalty will also apply if the five-year period has elapsed and the series of payments is modified before the employee attains age 59 1/2.​

Assume a taxpayer, upon turning 51 on January 1, 1993, commenced annual withdrawals of $50,000 from an IRA that constituted a series of substantially equal periodic payments. She withdrew $50,000 each January 1 until January 1, 1999, when she impermissibly modified the stream of payments by withdrawing $60,000.

The taxpayer would be subject to the penalty because the series of payments was modified after the close of the five-year period but before she attained age 59 1/2. The penalty would be $36,000, plus interest, calculated as follows:

1993–1998 $5,000 each year (10% of $50,000)
1999 $6,000 (10% of $60,000)​

And one other pitfall from THIS link.

Q. Assuming the 5-Year rule, when can payments be modified?

A. In 1998, a tax court held that a payment received by a taxpayer after he received five equal annual installments and after he reached age 59-1/2 was a modification of the Substantially Equal Periodic Payments.

The Court held that the modification occurred within the 5-year period beginning with the first payment, thus triggering the recapture of the 10-percent penalty tax. The Service [IRS] argued that the 5-year period began with the first distribution and ran until the end of the 5th year. The tax court agreed - the 5-year period closes at the end of the 5 years beginning with the first distribution, and does not end on the date of the 5th annual distribution.

Arnold v. Comm., 111 TC No. 12 (1998).

In other words five annual payments beginning at age 55 does not equal 5 years.
One must take one more payment to escape 10% penalty.

Payment #1 @ age 55 = Beginning of minimum 5 year period;
Payment #2 @ age 56 = End of year 1
Payment #3 @ age 57 = End of Year 2
Payment #4 @ age 58 = End of year 3
Payment #5 @ age 59 = End of year 4

Payment #6 @ age 60 = End of year 5.

 

[clester]

Gary,
Thanks for pointing those things out. You do have to be careful!

One draw back for me is that, if I use the amoritization method at age 50, the monthly payments are "level" for 9 years. No increase. No cola. The positive is that the payments are higher than with min. dist. method (but they increase yearly). I figure somewhere around age 59 1/2 they (both methods) will even out (counting an inflation calculation).

You have to decide which is more important in your situation.

 

[mayday]

http://www.cbiz.com/page.asp?pid=4726

Read this.

 

[clester]

Be careful with the reasonable interest rate. cbiz uses 4.53% which is from 2005. Currently its about 3.45% and it changes. If interest rates in general rise, so will the rate for 72t.

 

[mayday]

Be careful with the reasonable interest rate. cbiz uses 4.53% which is from 2005. Currently its about 3.45% and it changes. If interest rates in general rise, so will the rate for 72t.

Thanks Clester: How did you come up with that rate?

 

[clester]

I use www.72t.net because they keep up with that rate and have lots of great info.

 

[mayday]

I use www.72t.net because they keep up with that rate and have lots of great info.

Thanx clester for the info.

I just retired at 51 years old.

Just called TSP and found out that I can combine my other IRA to my TSP using form TSP-60, and I can combine my spouses IRA as long as she puts it in my name using the same form.

Then I can start drawing out TSP funds with-out the tax penalty.

Prerty cool uhh.