72(t) – Calculation question
I have a client who would like to do a Section 72(t) distribution. In working with his CPA, we (as a team) are unclear about something. Is it possible – in calculating his distribution amount – to consider only a portion of his total IRA? In other words, if he has $1 million in three IRA accounts, one of which has a balance of $300,000, can he calculate his “72(t)” distribution amount on only the $300,000 account? Or must he consider the entire value of all IRA accounts in his name?
Permalink Submitted by Alan Spross on Thu, 2007-08-16 21:59
A 72t plan can include any combination of IRA accounts a person may hold, but it cannot include only part of any particular account. Therefore, the client can indeed use only his 300,000 IRA and exclude the others. To reduce the risk of busting the plan by setting up an overly complex arrangement, it is best to partition available IRA accounts into a single account with the balance needed to generate the desired distribution. In your example, if he needs 400,000 to generate the amount he needs, he should transfer another 100,000 from one of the other IRA accounts into the 300,000 account prior to starting the plan. That can be done by using a reverse calculator on the site that follows. For those with sufficient assets, it is always best to have at least one other IRA account outside the “SEPP universe” to use for emergency distributions. The penalty may apply for the emergency distribution, but the 72t plan is protected against the severe cost of retroactive penalty and interest back to the inception year of the plan.
http://72t.net/Default.aspx
For those who have a basis in their TIRA, the total of all the accounts must be considered on Form 8606 to calculate how much of the 72t distribution happens to be taxable.