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Tax rules severely limit penalty-free access to IRA funds before accountholders reach age 59½ . A 10% excise tax applies to any such distribution unless taken because of disability, death, or in Substantially Equal Periodic Payments (SEPP). Under the SEPP method, an accountholder elects to receive IRA distributions over their entire life expectancy, in equal or near-equal amounts.
With early retirement and corporate layoffs becoming more and more common, some of your best customers may want to begin distributions from their IRAs before age 59½.
Rollovers and substantially equal periodic payments often go together. For example, a person, age 45-58, separates from service with his or her employer. He or she instructs the former employer to directly roll over the account balance (e.g. $50,000, $90,000, $150,000, $280,000, etc.) of the 401(k) plan and/or pension plan into an IRA. This person then wants to establish a series of distributions from the IRA to provide periodic income.
This type of situation has created a growing need for tax and financial advisors, as well as IRA custodian/trustees, to know how to handle such transactions properly, in order to protect their customers from harsh IRS penalties.
NEW RULES– In October of 2002, the IRS rewrote and clarified the rules to be met to have a “safe harbor” substantially equal periodic payment schedule. There are three (3) safe harbors within Rev. Ruling 2002-62.
TOOLS– Will you be able to assist your prospective customer? The SEPP schedule needs to be established correctly, and then it needs to be properly administered. CWF’s software will allow you to do so. This software allows you to provide an important service to your existing and future IRA clients.
CWF now offers SEPP, a Windows ® based software product providing all three safe harbor methods, and the software also allows you to create a non-safe harbor method. In addition, these methods may be modified by using an interest rate greater than permitted by the safe-harbor methods. SEPP contains forms which may be used to establish the payment schedule and to permissibly modify the schedule as authorized by Rev. Ruling 2002-62. The software features the use of the applicable Federal interest rates, which can be downloaded on a daily basis.
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