Author Topic: Not-so-equal SEPP in early retirement  (Read 3194 times)

mustachianteacher

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Not-so-equal SEPP in early retirement
« on: October 11, 2015, 12:55:35 PM »
My husband and I are both teachers with pensions that max out at age 62, but we'd like to FIRE when I am 52 and he is 55. (ish) The plan that makes the most sense for us is that we stop working at those ages, but we leave our pensions alone as long as possible because, similar to SS, the older we are when we start collecting, the larger the payment will be. Should something go wrong, we can start collecting our pensions at any time and it will be enough to meet our expenses, but I think we should be able to defer at least until we are each 60, probably more like 62-65. To bridge the gap, we'll live off our savings, which are currently about 2/3 in 403b accounts, and 1/3 in Roth IRAs. Based on my calculations, we'll have twice as much as the total amount we'll need between when we stop working and when we start our pensions, and once we're both receiving pension payments, we won't need our own savings for anything but big, irregular expenses.

My question is this: As I do the calculations, I can see that we will need to draw varying amounts from our savings several years. For the first year, we'll work until June and then need a modest amount for the rest of the calendar year. For a few years after that, we'll need to support ourselves entirely independently. Then, since my husband will be 60 3 years before I am, there will also be a few years where we'll collect his pension, but still make up the difference (between his pension and our monthly expenses) with our own savings before I start collecting mine. So, in order to met our needs, we won't exactly be taking substantially EQUAL periodic payments. So, my first questions is whether that is allowed.

Second, I have no idea how SEPP are calculated, but we'll need quite a bit more than 4% some years. It'll be more like 5% in the years we need to withdraw half our annual expenses, and 10% in the years we need to support ourselves completely independently. Is that allowed/possible?

Even when we're living entirely off our pensions, we should still end up with about 40%-50% of our initial portfolio intact, but we basically plan on using about half our savings to support that 7-10 year stretch between working and collecting pensions.

If the SEPP rules don't allow what we need, I suppose we have enough of a buffer that we could just pay the 10% early withdrawal penalty, but I'm trying to figure out what our options are.

MDM

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Re: Not-so-equal SEPP in early retirement
« Reply #1 on: October 11, 2015, 01:26:15 PM »

Cathy

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Re: Not-so-equal SEPP in early retirement
« Reply #2 on: October 11, 2015, 01:45:11 PM »
Second, I have no idea how SEPP are calculated...

The statute and regulations do not prescribe any particular formula. The IRS has published some safe harbour formulas that it will accept, but they aren't necessarily the only permissible formulas. If you want to use your own formula, you should retain counsel for (i) an opinion on whether your proposed formula is valid, and (ii) an opinion on whether you should obtain an advance determination of the validity of your formula. No one is likely to opine on either of those in the context of this forum, especially since it's very fact-dependent. The money spent on opinions could be worth if it allows you to design an optimal strategy.

sirdoug007

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Re: Not-so-equal SEPP in early retirement
« Reply #3 on: October 11, 2015, 01:46:35 PM »
No, variable payments are not allowed.  If you do vary payments before 59.5 you will be paying the 10% additional tax.

There are a few ways to calculate SEPPs.  In two of the ways, you take out exactly the same amount (to the penny) each and every year until you are 59.5.  The other is the minimum required distribution method which does not allow you to take much out, especially <60.

Your husband is 55 so he is only 5 years, maybe 4, from 59.5.  How much of your stache is in his name?  You could run down his accounts faster and leave yours for later in life and avoid the extra tax.  That could avoid the extra tax relatively easily.

mustachianteacher

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Re: Not-so-equal SEPP in early retirement
« Reply #4 on: October 11, 2015, 02:10:44 PM »
Instead of the SEPP, have you considered the Roth pipeline?  http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

I did think about that, but here's how I'm picturing this: Five years before retirement, while making our usual salaries, we'd have to transfer about $60K (1 year's expenses) from our 403b into our Roth. We're in the 25% tax bracket, though that would likely push us to 28% or even 33%, so the taxes on that $60K would be anywhere from $15K to almost $20K. This would come during the years we'd be stretching to pay college tuition, so I already foresee those as lean years.

I don't love the idea of paying a 10% penalty, but it does seem like it would vastly simplify a lot of stuff, and if we can afford our plan even with the penalty..... I dunno, I'm tempted! *ducking now*

mustachianteacher

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Re: Not-so-equal SEPP in early retirement
« Reply #5 on: October 11, 2015, 02:15:11 PM »

Your husband is 55 so he is only 5 years, maybe 4, from 59.5.  How much of your stache is in his name?  You could run down his accounts faster and leave yours for later in life and avoid the extra tax.  That could avoid the extra tax relatively easily.

Good point. Our accounts have roughly equal amounts in them, so that gives me something to think about. Your suggestion also made me think of the following: Since he is older, we could just bite the bullet and take a slightly reduced payout on his pension whenever he stops working, most likely 55. Then, we could make up the difference by withdrawing only from our Roth IRAs since we can take our contributions out without penalty or tax before 60. Hmmmm.... that might not be a bad plan.

lhamo

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Re: Not-so-equal SEPP in early retirement
« Reply #6 on: October 11, 2015, 02:58:27 PM »
If your DH retires at 55 he should be able to withdraw from his 403b plan at that point penalty free.  IRS guidance states"

"The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (State or local government) who separated from service on or after you reached age 50.

Distributions made to an alternate payee under a qualified domestic relations order, and

Distributions of dividends from employee stock ownership plans."

See https://www.irs.gov/taxtopics/tc558.html for the full text, and IRS Publication 557 for more details.

MDM

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Re: Not-so-equal SEPP in early retirement
« Reply #7 on: October 11, 2015, 03:16:15 PM »
I did think about that, but here's how I'm picturing this: Five years before retirement, while making our usual salaries, we'd have to transfer about $60K (1 year's expenses) from our 403b into our Roth. We're in the 25% tax bracket, though that would likely push us to 28% or even 33%, so the taxes on that $60K would be anywhere from $15K to almost $20K. This would come during the years we'd be stretching to pay college tuition, so I already foresee those as lean years.

I don't love the idea of paying a 10% penalty, but it does seem like it would vastly simplify a lot of stuff, and if we can afford our plan even with the penalty..... I dunno, I'm tempted! *ducking now*
You are thinking about the right things - keep up the good work.  Have you looked at http://www.i-orp.com/, http://basic.esplanner.com/, or other?  See https://www.bogleheads.org/wiki/Retirement_calculators_and_spending and https://www.bogleheads.org/forum/viewtopic.php?t=82299 for background.

mustachianteacher

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Re: Not-so-equal SEPP in early retirement
« Reply #8 on: October 11, 2015, 03:44:56 PM »
If your DH retires at 55 he should be able to withdraw from his 403b plan at that point penalty free.  IRS guidance states"

"The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (State or local government) who separated from service on or after you reached age 50.

Distributions made to an alternate payee under a qualified domestic relations order, and

Distributions of dividends from employee stock ownership plans."

See https://www.irs.gov/taxtopics/tc558.html for the full text, and IRS Publication 557 for more details.

I DID NOT KNOW THIS!!!

Sorry for shouting, but holy cow, you've just made my day! This is fantastic! Knowing this so far in advance is a beautiful thing too, because now we can ensure that there will be enough money in his accounts that we can depend on those for a good three years before we need mine. I'm so excited! Thank you!!

mustachianteacher

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Re: Not-so-equal SEPP in early retirement
« Reply #9 on: October 11, 2015, 03:46:23 PM »
I did think about that, but here's how I'm picturing this: Five years before retirement, while making our usual salaries, we'd have to transfer about $60K (1 year's expenses) from our 403b into our Roth. We're in the 25% tax bracket, though that would likely push us to 28% or even 33%, so the taxes on that $60K would be anywhere from $15K to almost $20K. This would come during the years we'd be stretching to pay college tuition, so I already foresee those as lean years.

I don't love the idea of paying a 10% penalty, but it does seem like it would vastly simplify a lot of stuff, and if we can afford our plan even with the penalty..... I dunno, I'm tempted! *ducking now*
You are thinking about the right things - keep up the good work.  Have you looked at http://www.i-orp.com/, http://basic.esplanner.com/, or other?  See https://www.bogleheads.org/wiki/Retirement_calculators_and_spending and https://www.bogleheads.org/forum/viewtopic.php?t=82299 for background.

No, I am not familiar with those. Thank you!

lhamo

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Re: Not-so-equal SEPP in early retirement
« Reply #10 on: October 11, 2015, 07:06:53 PM »
If your DH retires at 55 he should be able to withdraw from his 403b plan at that point penalty free.  IRS guidance states"

"The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (State or local government) who separated from service on or after you reached age 50.

Distributions made to an alternate payee under a qualified domestic relations order, and

Distributions of dividends from employee stock ownership plans."

See https://www.irs.gov/taxtopics/tc558.html for the full text, and IRS Publication 557 for more details.

I DID NOT KNOW THIS!!!

Sorry for shouting, but holy cow, you've just made my day! This is fantastic! Knowing this so far in advance is a beautiful thing too, because now we can ensure that there will be enough money in his accounts that we can depend on those for a good three years before we need mine. I'm so excited! Thank you!!

You are most welcome!   I happen to know about this little clause because my DH may retire before he can tap SS (he's currently 57 and will take SS at 62 so that we can get the child benefit for DD for a few years).  We also have Roth money we can tap if necessary, in addition to the likely very large stash our apartment sale will generate.  But knowing he can also tap his 403b money gives extra security.

You should probably check with your plan administrator just to be sure, though.  I believe sometimes school districts have really strange rules about their plans so you should understand what those are before finalizing your plans for retirement funding.