SEPP

[BlindDog09]

I have an IRA I am considering taking SEPP distributions (Yes, I have considered other options).  Quick scenario:

• I am 57 1/2, not yet retired
• I know I am locked into this until I am 62 1/2. 
• I have $1.5MM in this account
• My plan is to receive $70,000 / yr. in monthly installments of $5833.33 / month

My questions:

1. If I request this distribution in NOVEMBER 2023 in monthly installments to start on the 15th of the month, Do I need to take the entire $70,000 for 2023 or do I just get the November 15 and December 15 distributions of $5833 in 2023?  (I do not want to receive the entire annual distribution in 2023 for tax reasons).  I thought I may have read somewhere that I need to take the full year distribution by year end.
2. This IRA is a rollover that I made in August 2023.  What do I use as the balance of this IRA to determine distribution amounts?  Do I just use the balance on the day I request the distribution?
3. When calculating 5 years, is it calculated using 60 months?  For instance if I receive first monthly distribution NOV 15, 2023does the requirement last until OCT 15, 2028?
4.  Will Turbo Tax ask me all the proper questions to properly document that these distributions were compliant with 72(t)?  I talked with my bank - they will issue a 1099R but there is not reference that it is a SEPP distribution.

[dmertz · Accepted solution]

1.  I've read that the IRS allows either a full year's worth in the first year or an amount prorated by the number of months, but I don't recall where I read it, so I can't substantiate it.  The law requires that the equal payments be made no less frequently than annually, implying that they can be made as 60 equal monthly payments (since you will have reached age 59½ by the end of the 5-year period).  If other distributions were made from the same IRA before the establishment of the SEPP plan, it might be best to trustee-to-trustee transfer to another IRA the balance on which the SEPP plan will be established so that the relevant Form 1099-R reflects only the SEPP distribution(s).

2.  IRS Notice 2022-6 discusses SEPP plans.  Section 2.02(d) of that notice says:

(d) Account balance. For purposes of applying the required minimum distribution method, the account balance for a distribution year is determined under § 1.401(a)(9)-5. For the fixed amortization and fixed annuitization methods, the account balance must be determined in a reasonable manner based on the facts and circumstances. The account balance will be treated as determined in a reasonable manner if it is the account balance on any date within the period that begins on December 31 of the year prior to the date of the first distribution and ends on the date of the first distribution.

This indicates that your balance on any day between August 2023 funding date and the date you establish the plan would be reasonable.  Given that the interest rate that you propose to use for calculating the annual distribution amount is less than the maximum allowed, minor fluctuations in the account balance are probably not relevant.

3.  The 5-year period is 5 years to the day beginning on the date of the first SEPP distribution.  If the first distribution is on November 15, 2023, the 5-year period runs through November 14, 2028.  You would want to wait until November 15, 2023 or later (I suggest waiting until at least November 16, 2023) before taking any distributions from this IRA that are not distributions under the SEPP plan.

4.  TurboTax will ask if any of the listed penalty exceptions applies, one of which is for substantially equal periodic payments.  Entering the amount in this box will cause TurboTax to include the amount on line 2 of Form 5329 with code 02.

[BlindDog09]

Thank you very much.  You pretty much confirmed what I was thinking.  I appreciate the info.