With apologies to the writer and performers of the original “Sam, You Made The Pants Too Long!”… This article is about what happens when your IRA declines substantially in value and you’ve put a 72t Series Of Substantially Equal Periodic Payments plan (SOSEPP) into play – and the decline in value has brought your IRA to a point where the balance will no longer support your Equal Payments.
What Happens When Your IRA Will No Longer Support Your SOSEPP?
Here’s an example: You’ve set up a SOSEPP in your IRA, beginning at age 50. As we all know (see this post for details) you have to keep the payments going until you reach age 59½. During that time, many things can happen, both positive and negative. In this case, the IRA began with a balance of $100,000, and your annual payments are $3,000. Things go fine for the first few years, although your account doesn’t seem to be growing. So, you decide to take a leap and invest it all in a wild-eyed fund – some Madoff fellow’s running it. Then, lo and behold, one morning you wake up and find that your IRA balance has become – $12 total. You’re age 56, so you have three and a half more years that you are supposed to be taking this regular payment of $3,000 from your account! What do you do? You’ve read about the crazy penalties for busting a 72t payout plan – yikes!
Calm down. Take a breath, it’s really not so bad. There are several options: You could rollover funds from another account into the IRA, either from another IRA account or a 401(k). You could also choose to make your one-time change to your SOSEPP plan. Or, you could choose to let it die, and go on with your life. The best option is the last one – it allows you to be as flexible as you can be.
If you chose the first option, it certainly would work – and your SOSEPP would just continue on as originally planned. But what if you have decided at this stage that you really don’t need that series of payments anyway? And it’s just a pain in the rear keeping up with the paperwork and remembering to take the payment each year…?
The same holds true for the one-time change to the RMD method. If you did that, now you’d have to re-calculate your payment each year on a very small balance. Once again, a pain in the rear – so why not just take the third option?
Let it die
If you go ahead and take the last payment out of your account (the remaining $12) and close the account – your SOSEPP is no longer in effect. You now have the option of starting a new SOSEPP from another IRA account, or just discontinuing the idea of the 72t payout. If you chose to start a new plan, you’d have to start over with a new five-year or (since in the example, you’re age 56) for three and a half more years until you reach age 59½.
What’s key to understand in this is that, for SOSEPP’s, the IRS considers each IRA account separately – yeah, I know, for everything else, all IRAs are considered as one. What can I say? They don’t want you to get too comfortable and start predicting how they’ll move – just when you think they’re gonna zig? they zag. So with that in mind, if one account (the one with the SOSEPP attached) runs dry, there’s no penalty if you just drop it and move on with your life.
That’s literally all there is to it. No penalty, no muss, no fuss.
Photo by TimWilson