IP rolled over the entire Federal TSP bal. to a rollover IRA. TP had been receiving SEPP distributions. Has SEPP been broken by rollover, and therefore cause penalties?

[akw428]

TP not IP.   Rollover from a Fed Thrift Sav Plan to IRA.  SEPP 72T payments,  Does the rollover to IRA void SEPP

[PhoebeRoberts]

 I vote no, on the grounds that the 72(t) payments could have been calculated on only a portion of the original IRA balance. Normally, you'd split the IRA into an account to take substantially equal period payments from, and one that wasn't having distributions, but technically any given taxpayer only has one IRA (regardless of the number of accounts).

Would I have advised rolling over into a separate IRA-designated account? 100%. Will it be a hassle if they're using a 72(t) calculation that is based on the prior year balance, rather than a fixed dollar amount? Sure will! Do I think this blew the whole 72(t)? No.

That said, if I were the client (or if I were advising my client), I'd pay for a couple hours of research to document the statutory authority for the 72(t) requirements not having been blown.

So wrong. That's what I get for using logic, rather than actually looking it up. Thanks, @qbteachmt !

[qbteachmt · Accepted solution]

"No Additions or Subtractions Allowed

Once you start a SEPP program on a retirement account, you may not make any additions to or distributions from the account. This includes any nontaxable rollovers into other retirement accounts."

From: https://www.investopedia.com/articles/retirement/02/112602.asp

[PhoebeRoberts]

Alas. Hence the need for research. I'm interested in how that squares with the whole "you technically only have one IRA, regardless of how many accounts you split it into" thing. But not interested enough to actually do the research.

[qbteachmt]

You may have only one IRA theoretically, but SEPP calculations are done a bit differently. I try to stay on top of these issues specifically, and I love web-based articles or reference materials provided by the financial institutions/brokers that are written for the consumer, even if I follow that to the IRS or other resources.

And I don't think much has changed for this provision in all these years.

So, for example: https://www.thetaxadviser.com/issues/2008/oct/substantiallyequalperiodicpaymentsfromanira.html

"In the payment calculation it is not necessary to aggregate the account balances for all IRAs owned; only the balance of the IRA(s) from which the SEPP is drawn is considered. This gives some flexibility in adjusting the account balance by splitting or combining IRAs in advance to obtain the desired balance...  It is permissible, however, to include more than one IRA balance in the initial payment calculation. Distributions must then come from one or both of these accounts. If a taxpayer needs additional distributions, establishing a SEPP from another IRA account while simultaneously continuing an existing SEPP is not prohibited."

There is the provision for no penalty when the payment was modified (which includes eliminated) because the account balance has been exhausted, if the calculation method used resulted in the funds being used up. But moving the funds would cause the payments to stop because of that action (not because of computation used or account balance loss)..."when an IRA owner transferred funds out of the SEPP IRA into another IRA during the payment series and then attempted to reverse the transfer and restore the funds, this was considered a modification of the series and the 10% penalty was imposed.³⁶ In one recent case, the 10% penalty was imposed when a rollover into a SEPP IRA occurred three months before the end of the required five-year distribution period. This ruling was made despite the fact that the IRA owner had already received the final payment in the series at the time the rollover was deposited."

[qbteachmt]

Here are the parts for Rollovers and Account Depletion that I was recalling, from Rev Ruling 2002-62:

"Changes to account balance. Under all three methods, substantially equal
periodic payments are calculated with respect to an account balance as of the first
valuation date selected in paragraph (d) above. Thus, a modification to the series of
payments will occur 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."

"03 Special rules. The special rules described below may be applicable.

(a) Complete depletion of assets. If, as a result of following an acceptable
method of determining substantially equal periodic payments, an individual’s assets in
an individual account plan or an IRA are exhausted, the individual will not be subject to
additional income tax under § 72(t)(1) as a result of not receiving substantially equal
periodic payments and the resulting cessation of payments will not be treated as a
modification of the series of payments."

I think the point being, you wanted to take money routinely that is being taxed. You don't get to change this at will by using a strategy such as Rollover, to get around your commitment.

If an Advisor directed this mistake, that falls under a forgiveness provision. Otherwise, you would first Roll, then set up the SEPP. Not the other way around.

[PhoebeRoberts]

Thank you! It has been at least 15 years since I've actually seen an SEPP, which should have been enough for me to know better than to guess first and research second! 🙂

[akw428]

Thank you all for the input to answer to my question on the IRA Rollover and SEPP payments. Very helpful!

[AnmarieA]

The investment advisor from whom received the 401K rollover split the funds into multiple accounts. The investment advisor only wants to use one of the accounts to handle the 72t distribution. So no SEPP payments have been made yet as they are trying to calculate now. 

[AnmarieA]

This link helped clarify for me the SEPP account balance determination. Thanks!