SEPP (Substantially Equal Periodic Payments)
Question: I am 52 years old and thinking about possibly receiving a SEPP from a traditional IRA. Are funds allocated from an IRA account into a separate SEPP account in advance or do all the funds remain in the IRA? Also is the max SEPP payout based on the full IRA account balance or the SEPP account balance?
Permalink Submitted by Alan - IRA critic on Thu, 2015-01-29 00:52
You generally start with the amount of the annual IRA distribution you will need to pay your expenses including inflation for the longer of 5 years or until 59.5. A reverse SEPP calculator will then tell you the balance you need to generate that distribution. With today’s low interest rates, your IRA account must be somewhere around 23 times as large as your annual distribution. If you have MORE than that amount in all your IRA accounts, you then partition them by direct transfer to produce one IRA with the balance needed to fund the distribution. The other IRAs left outside the plan can be used for emergency needs to insure against busting your plan if you need more funds later on. If your IRAs hold LESS THAN the amount you need, then you will be at risk of busting the plan because at some point you will need more than you can withdraw. You CANNOT designate a portion of a specific IRA account for the SEPP, so the above partitioning of IRA accounts will produce one with a balance such that 100% of that account will fund your SEPP needs. Finally, the SEPP calculation is the EXACT amount that must be withdrawn each year. It is therefore both a min and a max amount.
Permalink Submitted by Joe Smith on Thu, 2015-01-29 16:19
Not sure that I’m quite following you. For example, if I have an IRA account with a $1 million balance and want to recieve an annual SEPP of $40k for the next 7 years until I turn 59.5 are you saying that I would have to transfer $280k (7yrs x 40k) into a new IRA account for the sole purpose of the SEPP?
Permalink Submitted by Alan - IRA critic on Thu, 2015-01-29 19:28
No. The SEPP reverse calculator determines that if you will be 52 at year end 2015, the account balance needed to generate an annual distribution of 40,000 is approx 908,000. You would first transfer 92,000 to another IRA account, leaving 908,000 in the IRA to be used for the SEPP. The other account could be used for emergency needs if in some year you need more than 40,000.
Permalink Submitted by Joe Smith on Thu, 2015-01-29 19:35
Gotcha. Thanks!