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72(t) Distributions

72(t) Distributions

Sometimes you can take penalty-free early withdrawals from retirement accounts.

 

Provided by MidAmerica Financial Resources

 

Do you need to access your retirement money early? Usually, anyone who takes money out of an IRA or a retirement plan prior to age 59½ faces a 10% early withdrawal penalty on the distribution. That isn’t always the case, however. You may be able to avoid the requisite penalty by taking distributions compliant with Internal Revenue Code Section 72(t)(2).1

 

While any money you take out of the plan will amount to taxable income, you can position yourself to avoid that extra 10% tax hit by breaking that early IRA or retirement plan distribution down into a series of substantially equal periodic payments (SEPPs). These periodic withdrawals must occur at least once a year, and they must continue for at least 5 years or until you turn 59½ (whichever occurs later).1,2

 

How do you figure out the SEPPs? They must be calculated before you can take them. Some people assume they can just divide the balance of their IRA or 401(k) by five and withdraw that amount per year – that is a mistake, and that can get you into trouble with the IRS.2

 

The IRS allows you to calculate SEPPs by three methods, all with respect to your age and your retirement account balance. When the math is complete, you can schedule SEPPs in the way that makes the most sense for you.

 

The Required Minimum Distribution (RMD) method calculates the SEPP amount by dividing your IRA or retirement plan balance at the end of the previous year by the life expectancy factor from the IRS Single Life Expectancy Table, the Joint Life and Last Survivor Expectancy Table, or the Uniform Lifetime Table.2

 

The Fixed Amortization method sets an amortization schedule based on the current balance of your retirement account, in consideration of how old you are in the current year and your life expectancy according to one of the above three tables.2

 

A variation on this, the Fixed Annuitization method, calculates SEPPs using your current age and Appendix B of Rev. Ruling 2002-62. If you use the Fixed Amortization or Fixed Annuitization method, you must also specify an acceptable interest rate for the withdrawals which can’t exceed more than 120% of the federal mid-term rate announced periodically by the IRS.2

 

A lot to absorb? It certainly is. The financial professional you know can help you figure all this out, and online calculators also come in handy (Bankrate.com has a very good one).

 

Problems occur when people don’t follow the 72(t) rules. There are some common snafus that can wreck a 72(t) distribution, and you should be aware of them if you want to schedule SEPPs. 

 

First of all, consider that this is a multi-year commitment. Once you start taking SEPPs, you are locked into them. You will take them at least annually, and you won’t be able to contribute to that retirement account anymore as the IRS doesn’t let you do that within the SEPP period.2

 

If you are taking SEPPs from a qualified workplace retirement plan instead of an IRA, you must separate from service (that is, quit working for that employer) before you take them. If you are 51 when you quit and start taking SEPPs from your retirement plan, and you change your mind at 53 and decide you want to keep working, you still have this retirement account that you are obligated to draw down through age 56 – not a good scenario.1  

 

Some people forget to take their SEPPs according to schedule or withdraw more than they should, and that can subject them to Internal Revenue Code Section 72(t)(4), which tacks a 10% penalty plus interest on all SEPPs already made. The IRS does permit you to make a one-time change to your distribution method without penalty: if you start with the Fixed Amortization or Fixed Annuitization method, you can opt to switch to the RMD method.3,4

 

How can I boost or reduce the SEPP amount? The easiest way to do that is to increase or decrease the balance in the IRA or retirement plan account. You have to do that before arranging the payments, however.2

   

If you need to take a 72(t) distribution, ask for help. A financial professional can help you plan to do it right.

       

MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com.

www.mid-america.us

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

    

Citations.

1 - irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments#2 [11/21/13]

2 - forbes.com/sites/advisor/2012/02/13/the-72t-early-distribution-from-your-ira/ [2/13/14]

3 - financialducksinarow.com/531/penalties-for-changing-sosepp/ [3/27/09]

4 - bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx [4/3/14]

 


Weekly Economic Update

MidAmerica Financial Resources Presents:

WEEKLY ECONOMIC UPDATE

 

WEEKLY QUOTE

              

“The worst days of those who enjoy what they do are better than the best days of those who don’t.”

     

- Jim Rohn

     

   

WEEKLY TIP

             

Moving to a new state? Double-check your estate planning documents to see if any changes need to be made.

  

   

WEEKLY RIDDLE

           

I have a horn and am almost as large as a car, but I will never honk my horn or outrun a car or truck. What might I be?

     

 

Last week’s riddle:

I can certainly run, but I will never be able to walk by myself. Wherever I go, thoughts are close behind me. What am I?

   

Last week’s answer:

A nose.

April 21, 2014

    

CONSUMER PRICES ADVANCE 0.2%

In reviewing March’s mild increase in household inflation, two statistics stand out. The Consumer Price Index measured a 2.7% year-over-year rise in shelter costs (the largest annual gain in six years). Americans also paid 0.4% for food last month. Annualized consumer inflation reached 1.5% in March, up from 1.1% for February.1

   

MARCH PUTS HOUSEHOLDS IN A BUYING MOOD

Retail sales rose 1.1% last month, bettering the (revised) 0.7% advance in February. Census Bureau data showed core retail sales (minus auto buying) up 0.7% for March; they increased 0.3% a month earlier.2

   

FACTORIES & BUILDERS GROW BUSIER  

According to Federal Reserve data, March was another solid month for industrial output – production rose 0.7%, and the Fed revised the February advance to 1.2%. Groundbreaking by builders increased 2.8% in March, though the Census Bureau also measured a 2.4% decline in building permits.2,3

 

BULLS RUN AGAIN

Stocks got a lift last week as the pace of China’s economic growth topped forecasts and Fed chair Janet Yellen stated that the central bank has a “continuing commitment” to supporting the economy. The weekly gains: NASDAQ, 2.39% to 4,095.52; Dow, 2.37% to 16,408.54; S&P 500, 2.71% to 1,864.85.4,5,6

  

THIS WEEK: On Monday, earnings roll in from Kimberly-Clark, Netflix and Hasbro and the Conference Board’s March LEI also appears. Tuesday brings March existing home sales figures, the April FHFA home price index and earnings from Bank of NY Mellon, Amgen, Harley-Davidson, Comcast, McDonald's, Travelers, Xerox, AT&T, Discover Financial, Yum Brands, Lockheed Martin and Lexmark. March new home sales numbers are out Wednesday, plus quarterly results from Dow Chemical, Owens Corning, Boeing, Procter & Gamble, Facebook, Ericsson, Northrop Grumman, TD Ameritrade, Ingersoll-Rand, E*Trade, Zynga, Texas Instruments, Snapple, Delta Airlines, Raymond James, Safeway and Qualcomm. Thursday, earnings from Broadcom, Under Armour, Starbucks, Jet Blue, Altria, General Motors, Starwood, Microsoft, Amazon.com, Caterpillar, Verizon, 3M, UPS, T. Rowe Price, Novartis, PulteGroup, Raytheon, AstraZeneca, Occidental Petroleum, Eli Lilly, Dunkin Brands, DR Horton and Pandora arrive plus data on March hard goods orders and a new initial claims report. Friday, the University of Michigan’s final April consumer sentiment index comes out, plus earnings from State Street, Colgate-Palmolive, Ford, Goodyear, Honda, Weyerhaeuser and Tyco.  

  

% CHANGE

Y-T-D

1-YR CHG

5-YR AVG

10-YR AVG

DJIA

-1.01

+12.24

+20.36

+5.70

NASDAQ

-1.94

+27.80

+28.96

+10.52

S&P 500

+0.89

+20.16

+22.89

+6.44

REAL YIELD

4/17 RATE

1 YR AGO

5 YRS AGO

10 YRS AGO

10 YR TIPS

0.52%

-0.64%

1.70%

1.87%

 


Sources: USATODAY.com, bigcharts.com, treasury.gov - 4/17/146,7,8,9

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.

These returns do not include dividends.

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Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser.
MidAmerica Financial Resources and Malan Financial Group are separate and unrelated companies to NPC.

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

 

Citations.

1 - marketwatch.com/story/consumer-prices-rise-02-in-march-2014-04-15 [4/15/14]

2 - briefing.com/investor/calendars/economic/2014/04/14-18 [4/17/14]

3 - latimes.com/business/money/la-fi-mo-housing-starts-20140416,0,4151864.story [4/16/14]

4 - bloomberg.com/news/2014-04-16/u-s-stocks-maintain-gains-as-yellen-signals-support.html [4/16/14]

5 - google.com/finance?q=INDEXDJX:.DJI&ei=5IRQU7iUAaSsiQK1Kw [4/17/14]

6 - usatoday.com/money/markets/overview/ [4/17/14]

7 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=4%2F17%2F13&x=0&y=0 [4/17/14]

7 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=4%2F17%2F13&x=0&y=0 [4/17/14]

7 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=4%2F17%2F13&x=0&y=0 [4/17/14]

7 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=4%2F17%2F09&x=0&y=0 [4/17/14]

7 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=4%2F17%2F09&x=0&y=0 [4/17/14]

7 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=4%2F17%2F09&x=0&y=0 [4/17/14]

7 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=4%2F16%2F04&x=0&y=0 [4/17/14]

7 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=4%2F16%2F04&x=0&y=0 [4/17/14]

7 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=4%2F16%2F04&x=0&y=0 [4/17/14]          

8 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [4/17/14]

9 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [4/17/14]





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