72(t)
I am working with a client who might set up a 72(t) distribution. Can we set up multiple IRA’s but caluculate the 72(t)amount on one of the IRA’s and take the distribution from this one?
Thanks.
I am working with a client who might set up a 72(t) distribution. Can we set up multiple IRA’s but caluculate the 72(t)amount on one of the IRA’s and take the distribution from this one?
Thanks.
Permalink Submitted by Alan Spross on Wed, 2010-06-23 00:06
You can include any number of IRAs in what is termed the “SEPP universe”. The total balance of all the accounts selected must be used to develop the 72t annual distribution. Once that amount is determined it does not matter which of the accounts actually funds the distributions.
Of course, the more moving parts to the plan, the greater the chance of error, and also even if there is no error, an IRS inquiry regarding the plan.
It often is a good idea to do direct transfers between plans before the calculation is done to create a total balance that will generate the distribution needed over the term of the plan.
Permalink Submitted by mk foss on Wed, 2010-06-23 17:13
I agree with Alan. You want to isolate the IRA subject to the 72(t) withdrawals so that you don’t make inadvertent contributions or extra distributions from that account. The remaining IRA or IRAs can be tapped as need be for higher education, medical expenses or some other reason that exempts you from a 10% penalty. Even if someone had to take a distribution that would be subject to the 10% penalty, by taking it from a different IRA, you don’t disturb the 72(t) stream and make them all subject to penalty.
Permalink Submitted by [email protected] on Wed, 2010-06-23 17:35
So the total balance of all IRA’s has to be used. I was hoping that just the balance of one of the IRA’s could be used. If he has two IRA’s. one with a balance of 1,000,000 and one with a balance of 450,000, the calculation needs to be done on the 1,450,000. Correct?
Permalink Submitted by Al Fry on Wed, 2010-06-23 18:07
One CAN do what you suggested. What Alan and May Kay were saying, is that once it is decided which IRA(s) are to be used, they become the “72(t) Universe” that cannot be changed.
Permalink Submitted by mk foss on Wed, 2010-06-23 20:57
More specifically what you would do is figure out how much your client needs per month, quarter or year. Then use a backwards calculator like you find at 72t.net to see how large the IRA needs to be. Let’s say you need an IRA of %648,702 to get the payments the client needs. Then you take that much from the $1 million IRA and set it up as a new IRA. All distributions will come out of the new IRA. If they need extra money, they can dip into the $450k one or what’s left of the million dollar one and not screw up the 72(t) payment stream.
Permalink Submitted by Alan Spross on Wed, 2010-06-23 22:54
Al – good to hear from you again. We have been missing your expertise on annuity related questions.
With respect to the original post, a typical 72t question arises when a 72t participant is convinced to spin out by direct transfer some portion of the IRA funding the 72t plan to a less liquid investment. Barring a couple of apparently aberrant IRS letter rulings, the 72t plan now consists of two IRA accounts, the original one that is liquid and from which the 72t annual distribution will still come, and the newer IRA that is less liquid and from which the participant does not intend to take distributions.
This is OK to do as long as no other errors are triggered. The newer account will not issue a 1099R if no distributions are taken, and the original one will still issue a 1099R showing the correct and actual amount taken out. However, if they are not already coding these distributions as early (Code 1), they will almost certainly switch over to a Code 1 after the transfer out. This is easily resolved by attaching Form 5329 to the tax return and claiming the 72t exception (Code 02) on the 5329. This is not a red flag to worry about because the majority of custodians are using the Code 1 even if no transfer out is made.
Permalink Submitted by Al Fry on Thu, 2010-06-24 00:11
Was in Germany-footsteps of Martin Luther. The original post sounded as the 72(t) had not yet been set up, which would mean sparationg into two IRAs would be ok. Perhaps I missed something,
Permalink Submitted by Alan Spross on Thu, 2010-06-24 00:22
Right, I don’t think that the plan had been established yet. The structuring/transfers of IRA accounts can be more effectively done before the plan begins and the aggregating of distributions can certainly be done either from the beginning or later on as I described previously.
One pitfall to avoid is using the total balance of IRA accounts that are NOT to be included in the plan and/or not including the total balance of those that are. Also, be sure there are no contributions or distributions taken from any of the IRAs in the SEPP universe between the date used for the initial account balance and the date of the first 72t distribution.