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sentvisser

Substantially Equal Periodic Payments

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I retired at age 54 and started taking distributions from my 403(b) plan using substantially equal periodic payments (SEPP's) that avoid the 10% tax penalty for early retirement. I've done this for 3 years now, and must continue to do it until I'm 59.5 years old.

 

If anyone has questions about these, I can answer some.

 

One question I don't have the answer to, however, is: can I roll-over part or all of the 403(b) to an IRA after I have started taking SEPP distributions? That is, will the IRS permit it without penalty?

 

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Guest Chuck Yanikoski

First, you are correct about age 59-1/2 in YOUR case, but others need to be advised that the general rule is the LATER of age 59-1/'2 and five years. So if someone starts at, say, age 57, s/he would have to go for five years, not just to age 59-1/2.

 

Second, to answer your question, there does not appear to be any restriction on rollovers because of such distributions. If you used either the amortization or the annuitization method, your annual withdrawal amount is fixed, and it should be permissible just to keep withdrawing that amount. If you used the Required Minimum Distribution method, however, the IRS could arguably say that that method is based on the total account balance, so that if you rolled a 403(b) into an existing IRA, your annual withdrawals would be based on the total balance, not just the original 403(b) balance. This interpretation is all the more likely if it becomes difficult to determine in future years how much of the balance is attributable to the 403(b) money as opposed to the original IRA money. If, however, you roll the 403(b) into a separate, new IRA account, this will not be a problem, and so if you are using the RMD method, that is what I would recommend that you do.

 

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Thanks Chuck. I used the annuity method which maximized my annual distributions, and I would create a new IRA with part of the assets. I could then take my annual distributions from either account, or both, because it is a set amount and not a percentage of assets?

 

for others who are following this conversation, find out all your distribution options well in advance of retiring. If I had waited one more year, I could have taken any size distribution as a result of separating from service at age 55. But I wanted out real bad; so I went with the SEPP's which you have to stick with for 5 years or until you are 59.5, whichever is greater. The annuity method for determining how much you can take out without incurring a 10% tax penalty, depends on your life expectancy, and on prevailing interest rates (there's something called the applicable federal rate). The annuity method is the most difficult to calculate, and since it maximizes the the size of the distributions that you can take out, you could deplete the fund before you reach 59.5. In that case you can't take out the distribution that you have contracted for, and so you are liable for the 10% extra tax on the previous withdrawals, plus the penalty for late payment of that tax, even though you have no money left. This could have happened to anyone retiring in 2000, who kept their money in technology stocks.

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Last year, Treasury issued Revenue Ruling 2002-62 which provides guidance on substantially equal periodic payments. In that ruling, a special rule says that if you deplete your account, you don't have to pay the 10% penalty on prior withdrawals.

 

Wasn't that nice of them?

 

 

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Guest Chuck Yanikoski

Three further comments:

 

First, if you roll over only part of your 403(b) account, I don't see that you have any basis for NOT making your SEPP withdrawals from the 403(b). I would not advise you to try doing a partial rollover, then taking some of the withdrawals from the IRA. The IRS might be OK with this, but I would not could on it.

 

Second, as far as depleting the account goes, the new regulation that Michael referred to also provides that you can make a one-time switch from either the Annuitization or the Amortization methods to the Required Minimum Distribution method. This generally results in a dramatically lower distribution, and also makes it virtually impossible to deplete your account because of SEPPs, because the mandatory withdrawal is not a level amount, but always a fraction of the prior year-end balance. Again, though, I think that the IRS would object if you rolled some money out of your account, then tried to switch to the RMD method.

 

Third, yes, these calculations can be a little tricky. Our company licenses a calculator for them which you can find at http://www.stillriverretire.com/72t/SRRPS_web_72t_1.asp. We do not license it to individuals, so if you are using it just for your own purposes, we don't mind. However, we do not warranty the results, even though we have every reason to believe that they are correct. So proceed at your own risk...

 

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Last night, I re-read Rev. Rul. 2002-62. In section 2.02(e), it says that "a modification to the series of payments occurs if, after such date, there is (i) any addition to the account balance other than gains or losses, (ii) any nontaxable transfer of a portion of the account balance to another retirement plan, or (iii) a rollover by the taxpayer of the amount received resulting in such amount not being taxable." (The date referred to is the valuation date on which payments are determined.)

 

Since a modification triggers a recapture of past taxes, penalties and interest, it would seem that a rollover of part of the 403(b) to an IRA in this situation (because the annuity method was used to determine payments) would be ill-advised until the expiration of 5 years or until you reach age 59-1/2, whichever occurs last.

 

As Chuck mentioned, there is a provision allowing a one-time, irrevocable election to switch to the Required Minimum Distribution method. If this were done, it may be permissible to make a transfer after the switch because of the provisions of Section 2.02(d), which relate to the manner in which the account balance is determined. However, I echo Chuck's comments that you proceed at your own risk, since the IRS may still view the transfer as a modification as discussed above.

 

Hope this is of some benefit. Good luck!

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