72T Multiple IRA’s

Submitted by [email protected] on Mon, 2011-04-18 17:41

A client has the need for 72T payments and has the ability to have multiple IRA accounts. Do I understand correctly that one IRA can be done as a 72T payment for 5 years or age 59 1/2 (whichever is longer) on only one of the IRA’s? The other IRA’s could then be left in deferral?

THank you



Submitted by Alan Spross on Mon, 2011-04-18 18:13

Yes, that is correct. You can select only one IRA for the 72t plan, but you cannot use only part of the balance any IRA accounts you select.

Therefore, before the plan is started a reverse calculator should be used to determine the account balance needed to produce the annual distribution needed. The max interest rate should be used and an individual (not joint) calculation done. Various direct transfers between IRA account should then be done to create an IRA account that holds the balance indicated by the reverse calculator.

The other IRA accounts not part of the 72t plan can be used for emergency needs or be used to start a second independent 72t plan later on if living costs increase. Each plan is totally independent of the other.



Submitted by [email protected] on Mon, 2011-04-18 18:22

Thanks for your response Alan. Is it possible to use a SPIA for 72T payments?
This is the first one I have run across in a long time.



Submitted by Alan Spross on Mon, 2011-04-18 18:57

It is possible, but there are considerable added complications, and loss of flexibility because the 72t calculation cannot be overridden by the annuity options. In most cases, the complications produce too much risk to be worth it and I would not recommend it.

Since the IRA SPIA payout is not going to exactly match the 72t calculation, an additional IRA account will be needed to become part of the 72t calculation to reflect that the SPIA may pay out more than the calculation based on just the annuitized IRA account. The shorter the term of the SPIA the larger the other account will have to be, and of course no distributions could come from the other account. If the SPIA is based on life expectancy, then it will be closer to the 72t calculation. If it pays even less, then another IRA is needed to make up the difference in the annual distribution. There is no automatic compliance with 72t rules even if the SPIA is based on life or joint life expectancy. You can see how this complexity could lead to a critical error, or at best to the IRS asking a bunch of questions.

The above is not a problem with NQ annuity SPIAs because there is a penalty exception for annuitized payments under Sec 72q. But not for IRA annuities under 72t.

Loss of flexibility includes the SPIA lasting longer than the 72t would have to, the inability to change to the RMD method to reduce payments (eg taxpayer goes back to work), and the inability to take distributions when you want them during the year, ie front or back loaded.



Submitted by [email protected] on Tue, 2011-04-19 13:06

Thank you Alan.



Submitted by Scott Cousino on Wed, 2011-08-10 15:33

As a follow-on question, can an IRA owner execute a 72t schedule from her total IRA account balance in multiple accounts while pulling the 72t payment from only one account? As an example:

IRA #1 account balance $500,000
IRA #2 account balance $300,000
IRA #3 account balance $200,000

Client is 49 years old and develops the 72t schedule based on a $1,000,000 total IRA account balance creating a $44,646.54 per year SEPP (amortization method). Can she draw the $44,646.54 per year from one of the IRA accounts without combining them all into one account? Acknowledging that this will likely create a shortfall in any of the three accounts alone, the strategy would be to fill the account from which the SEPP is being withdrawn as needed from one or both of the other accounts as the SEPP withdrawal account was approaching full liquidation.

Thanks!



Submitted by Alan Spross on Wed, 2011-08-10 21:20

Yes, aggregation of IRA accounts that together are part of the 72t initial balance is allowed. Transferring funds would have the advantage of limiting the 1099R to just one IRA account, but distributions could be taken from any of the other two accounts if desired. The total amount withdrawn is the critical issue.

10 years is a long time for a plan to satisfy living costs needs. One way to provide some “insurance” against having to bust the plan several years down the road is to transfer before the plan so that one of the IRAs has around 100,000 and then leave that IRA outside the plan. The annual SEPP amount would be 10% lower, but the 100,000 could be tapped at anytime for emergencies without busting the plan. In the year of the emegency need, if client meets a different penalty exception (eg high medical costs) the distribution from the separate account would have it’s own penalty exception, otherwise those distributions would be subject to penalty. But the other two IRA distributions would be penalty free if the annual SEPP amount was the amount distributed from them.



Submitted by Scott Cousino on Thu, 2011-08-11 15:00

Alan…thanks again for your wise counsel! Your strategy of holding an “outside” account is exactly what we’re planning to do, but I used hypothetical numbers to make the example easier to explain. Not only that, but the retiree will be getting another $1M next year that won’t have a SEPP schedule attached to start. Thanks again!



Submitted by Thomas perry on Thu, 2012-06-28 19:39

Your Thoughts….
I am 51 yrs old and i am seperating from service with a lump sum of 700k along with 400k in a 401k. The combined 1.1 million at the 1.57 June Fed mid term rate will allow me to withdraw 42k per year. My plan is to put the lump sum into a variable annuity with a GMIB compounding at 5% for income and use the 400k from 401k as my 72t account while the annuity is still compounding @ 5%. What i do not like is the fact that i may use up all my liquid funds by the time i reach 59.5. I do have access to 10% plus any gains per year from annuity.

your thoughts



Submitted by Alan Spross on Thu, 2012-06-28 20:01

Of course, annuities have their own expense related issues, but you can certainly establish a 72t plan that is calculated using the total balances of the annuity IRA and the non annuity IRA. You can then take the 72t distributions in any combination you wish between the two IRA accounts. Therefore, if the non annuity IRA is drained, you can finish the plan by taking your required distribution from the annuity IRA.

It is possible that in a year where you take distributions from both accounts and get two 1099R forms, you may get an IRS inquiry, but there is no doubt that this is allowed, so you would just have to make your explanation. You will also probably be filing Form 5329 each year to claim your 72t exception for each 1099R that applies.

For 2012 you have the choice to either distribute the full 42k OR pro rate the annual amount based on the month of your first distribution.alan-oniras



Submitted by Thomas perry on Wed, 2012-07-11 19:57

Alan, if I am starting income in Aug of this year, do I still calculate balance as of 12/31/2011.
Also, it would be hard to do being that 700k is part of a lump sum pension option that really has no account value and it is based on years of service…

Your Thoughts.



Submitted by Alan Spross on Wed, 2012-07-11 20:21

No, since you apparently are doing direct rollovers into two IRA accounts (or into one account from which you will then transfer funds to an annuity IRA), your opening account balance cannot be on a date prior to when these IRAs are established. Use the combined balance after both IRAs are created and on the SAME DATE. The date must also be prior to ordering your first 72t distribution.

If you use a mid month date, you need to be able to document the values of both accounts by making copies of an on line or other statement showing the balance for both accounts. You should also document your calculations (age, interest rate used, month of first distribution etc).

Time might be an issue if you want to use the 1.57 interest rate because the first distribution would have to be out in July. If your initial distribution is in August, the interest rate drops to 1.28 and that will reduce your allowed distribution.

Try to avoid “trailing distributions” if you can. That could result from a stock dividend that was not paid when you did the rollover, and when it is paid the plan forwards it to your IRA after you determined your balance or started your plan. This causes problems with your plan since a 72t IRA cannot receive contributions or distributions other than 72t distributions. If you think this is a problem, let me know and I can advise how to avoid it.



Submitted by Thomas perry on Mon, 2012-07-16 16:49

Alan, need to clarify one last thing…
You said: It is possible that in a year where you take distributions from both accounts and get two 1099R forms, you may get an IRS inquiry.
I am being told the opposite by my advisor that if I need 40k per year income I need to take another 150k from 401k and move to annuity which will have account balance of 850k of which I am OK with. We then set up a systematic withdrwal program based on both account values (850k annuity, 250k 401k) 1,100.000 @ 120% mid term rate of 1.25% equals 40k.
He is telling me that this way will create an IRS INQUIRY every year which we will have to prove account balance every year to irs.

Snap shot: 850k in Variable annuity w/ 5% Guaranteed compounding for income.
250k in 401k.
72T withdrawal would around 40k.
Withdrawal coming from annuity but based on a value of 1,100.000

Thank you for all your help.



Submitted by Alan Spross on Mon, 2012-07-16 17:58

You would not be able to establish a single SEPP plan that combines values in a 401k and an IRA. Those are two totally different types of retirement plans. Your basic choices:
1) Have two totally separate SEPP plans, one from the 401k and the other from your IRA (annuity or non annuity IRA). I don’t recommend using a 401k for a SEPP plan as you have limited control to correct any error and most plan administrators offer little support for a SEPP plan.
2) Roll over the 250k from the 401k to a non annuity IRA and you will have two IRA accounts, one of which is the annuity. Since both accounts are IRAs, you can combine the account values for calculation purposes and take the distributions in any combination over the two accounts. Taking it all from one of the IRAs would be OK.

My prior post assumed that your entire 401k would be rolled over to IRA accounts, one an annuity IRA and the other a non annuity IRA. But your post still mentions a 401k balance………

The interest rate of 1.25 is OK for an August start date. If you take the full distribution from the annuity (be sure this is allowed without any surrender charges), that is OK. You will only get one 1099R for your SEPP distributions that way. Of course, for this year you will also have a 1099R to report the 401k rollover.



Submitted by mk foss on Mon, 2012-07-16 21:56

I thought you had to separate from service before you use use 72t with a Section 401k plan. If you’re unable to move the benefit to an IRA before you start, you may not be able to include that balance in the 72t calculation.The 401k just doesn’t work without a separation from service because more funds would be going into it (or could be going into it) and that would bust the 72t.



Submitted by Alan Spross on Mon, 2012-07-16 23:36

Mary Kay,
Poster is in process of separating now. But it’s not real clear if they want to leave the 401k in place or partially in place or if they are referring to the rollover IRA as a 401k……….but an aggregate amount over an IRA and a 401k in a single 72t plan would probably would not fly.



Submitted by Scott Cousino on Wed, 2012-10-03 19:08

Alan,

I have a scenario related to your posted reply:

“2) Roll over the 250k from the 401k to a non annuity IRA and you will have two IRA accounts, one of which is the annuity. [u]Since both accounts are IRAs, you can combine the account values for calculation purposes and take the distributions in any combination over the two accounts.[/u] Taking it all from one of the IRAs would be OK.”

In establishing a SEPP for an IRA owner that began distributions 01-01-2010, we had two separate IRA accounts set-up with the total balance used to calculate the withdrawal amount. However, the full withdrawal amount was being taken from only one of the two IRA accounts. Recently, it made sense to reallocate some of the funds from the distributing IRA into the non-distributing IRA via a direct transfer. The distributing IRA custodian is saying that this forces them to code all future distributions from the distributing account as early distributions without exemption because they don’t know the status of the funds that were directly transferred to another IRA custodian.

My argument has been that the distributing IRA custodian never had the full IRA account balance on which the SEPP distribution was based. This transfer was not a distribution, but a direct transfer from one IRA custodian to another pre-existing (from SEPP inception) IRA custodian from which no distributions are being made. They’re saying our only recourse is to either put the funds back into the account with the distributing IRA custodian or have the IRA owner complete an IRS form every year to demonstrate that the exemption still applies.

Thoughts? Thanks in advance!!



Submitted by Alan Spross on Wed, 2012-10-03 20:47

This is nothing to worry about.

Most IRA custodians today do not undertake to underwrite the accuracy of a 72t plan and therefore code the 1099R form as if the plan did not exist. Code 1 is used in Box 7, and the taxpayer then files Form 5329 every year with their taxes to change the code 1 to exception code “02”. That tells the IRS that a 72t plan is being used. While the taxpayer’s form does not carry the credibility of a 2 code on the 1099R, it certainly is no longer a red flag to the IRS because most custodians are forcing their customers to file that 5329.

It is somewhat surprising that the IRS allows custodians to disregard IRS 1099R coding instructions. It could well be the IRS feels somewhat responsible because they have never issued Regulations summarizing in detail exactly what is allowed and what is not for 72t plans. Custodians therefore are not real sure whether a plan is valid or not, and most are playing it safe with a hands off approach.

Sounds like in this case the custodian was providing Code 2 in the past even though they did not hold all the assets used in the 72t calculation. So really, the transfer does nothing that suggests the client will no longer withdraw the correct total. It’s either sour grapes over the loss of assets or simply uninformed policy regarding coding procedures.

Therefore, the client should file the 5329, but all along should be sure they have documentation for the original calculation just in case the IRS inquires about anything.



Submitted by Scott Cousino on Fri, 2012-10-05 16:45

Again, Alan…thank you SO much! Nice to have the confirmation and to know my thought process wasn’t askew!!



Submitted by Jason DeVries on Fri, 2014-03-14 02:06

Hi,I am contemplating a 72t for a 54 1/2 year old who has about 1MM of IRA money total.Considering using a brokerage IRA, a deferred VA, and a SPIA- and a oh crap IRA account outside the 72t with about 50k in case she needs more money and doesn’t want to bust the 72t before age 59 1/2 Or 5 years and a day after starting her 72t.Can we establish the 950k number using the three separate accounts?  Can we then use the spia with approx 350k dialed in for the exact calculated 72t yearly payout for the 950k total, but also dialed in to get the client to age 65, to maximize the income step up guarantees of the Variable Annuity?These numbers aren’t exact yet, but say we fund: 350k SPIA, 550k VA, and 50k brokerage ira-> as part of 72t calculation.  50k in other brokerage IRA, in case she needs lump sum amount beyond approximate $3500 72t required monthly distribution she would receive from SPIA.What must occur to both use and document the use of a SPIA in a 72t?Thank you for your help.Jason 



Submitted by Alan - IRA critic on Fri, 2014-03-14 03:38

This structure would should work as long as the SPIA 72t plan matching distribution was backed into while partitioning the IRA accounts before the plan starts. Documentation of the plan calculations would be done as with any other plan using the highest interest rate for the two prior months, age of IRA owner and account balance of 950k used in the calculation. Since this would be a rather unique set up that the IRS is not used to and a 5329 will probably have to be filed to claim the SEPP exception, it would be wise to limit all distributions to the SPIA IRA account.  There must be a min of 60 months worth of distribution in the plan, and with a SPIA payout the first year distributions must be pro rated by the month since a full annual payout is not possible. So if the plan starts in April, 9/12 of the annual distribution would be distributed and the first 1099R would reflect 75% of the SEPP calculation.



Submitted by Jason DeVries on Fri, 2014-03-14 18:50

Alan, thanks for confirming the methodology we are considering.  I’m not sure I totally understand what you meant by the 9/12th’s 1099 comment.  If we dial in the SPIA to be exactly 1/12 of the annual allowed 72t amount and pay monthly starting in April as you state, do we need to add anything from other IRA’s to offset the other 3/12 for the first year or do we simply need to document the calculation And state that it is being paid monthly?  Please clarify that and thank you again for your help.  Jason 



Submitted by Alan - IRA critic on Fri, 2014-03-14 18:59

If the SPIA will pay monthly, that is fine as it will provide a pro rated first year SEPP distribution. The other comments were directed at the complications resulting from attempting to get a full annual payment distributed in the first year, which is a permitted option. If client felt he needed the full annual payment, the option to take the balance from another IRA account in the plan exists, but it adds another moving part to the equation in the form of an extra 1099R for this year only. It would be wise to emphasize to the client that there other IRA accounts that are included in the original account balance computation remain part of the SEPP plan and no contributions or distributions that are not SEPP distributions can be taken from those account until after the plan terminates. 



Submitted by dan casey on Sun, 2014-03-30 11:12

I have a client that is 58 years old and needs money to make health insurance premiums.  Her only money is her 200k IRA.  Can I move enough money to make 5 years of premium payments into another IRA and set up the 72t payments from just that IRA and not touch the other one?  Someone asked something similiar and you answered, “Yes, that is correct. You can select only one IRA for the 72t plan, but you cannot use only part of the balance any IRA accounts you select.”  The last part of that sentence is what confuses me.  I think what you are saying is if you leave it in ONE IRA you can’t select part of the balance to calculate the 72t payments.  Right?



Submitted by Alan - IRA critic on Sun, 2014-03-30 16:51

  • Note that if the client is recently unemployed and collected for at least 12 consecutive weeks, there is an IRA penalty exception for payment of the premiums, and client would not need a 72t plan.
  • There is another medical exception to the penalty that might work. Amounts in excess of 10% of AGI for all medical costs including premiums can be used to waive the penalty. But the same expenses cannot be used for both exceptions (premiums qualify under this exception and the exception above. 
  • If A 72t plan is started, the IRA balance will need to be roughly 22 times the expected medical costs in the highest year, and that amount could be tranferred to a new IRA account, but these distributions will have to last 5 years. The transfer is needed because client cannot just use part of the balance of a single IRA account when setting up a 72t plan.

  



Submitted by dan casey on Tue, 2014-04-01 14:47

Thank you.  I do know the other exceptions.  She is not unemployed and her and her husband make enough where the amount in excess of 10% would still cause large penalty amounts.  And according to my calculations your 22 times figure is spot on.  It just confuses me why if she only needs $7200 a year (and required to take it for 5 years) why the balance of her IRA needs to be over $150,000!  Crazy.



Submitted by Alan - IRA critic on Tue, 2014-04-01 15:48

The current low interest rates in conjunction with either of the two fixed dollar 72t calculations designed to produce a life expectancy distribution are responsible. Perhaps she should come up with another method such as a loan in order to avoid being tied down with a 5 year 72t plan when she is already 58 with not long to go to reach 59.5.



Submitted by Marc Sanders on Thu, 2014-05-01 18:25

I have a client who is taking 72(t) payments of $8,000 per year from his IRA. He is now 57 years old, and is three years into the 72(t) plan. He has only this one IRA.This is the question: Can he leave enough in this account to complete those payments, and do a custodian to custodian transfer of the rest of the IRA funds into a different IRA account? He would then have two IRA accounts. The old account would be used to satisfy the 72(t) payment plan, and the other would be used for something else. Can he split an IRA after starting a 72(t) plan, or would that bust the plan?Thank you for any guidance on this.



Submitted by Alan - IRA critic on Thu, 2014-05-01 19:28

See reply to your other post. In addition to that explanation note that if the value of the investments drop in the original IRA, there might not be enough to complete the plan without tapping the new IRA account. That would not bust the plan in itself but the 1099R from the new IRA might attract some IRS attention to the fact that a partial transfer was made. The risk is very small, but client should be alerted to it nonetheless and then weigh the advantage of the transfer against that risk of a problem. I certainly would avoid a partial transfer in the last year of a 10 year plan, but in the 3rd year of a 5 year plan the cost of a busted plan is much less in the unlikely chance that the partial blows up. See other post for the rest of the analysis.



Submitted by Charles Shinneman on Mon, 2018-08-27 20:06

I am working on a current client’s financial plan and he retired a couple months ago at the age of 54.  Has 2.4million in his IRAs and 600k in NQ.  Setting up the 72t distribution plan for him is crucial for having preserved NQ monies.  The current strategy I have proposed will have him in 4 IRAs.  There will be 2, 1million dollar IRAs(annuities) and 1, 300K IRA(annuity) and 1, 100k IRA(market).  My strategy I have worked into the plan is to take from 1 annuity after 1 year of deferal.  This amounts to be $96,038 for the next 7 years then utilize another couple annuities that will be out of surrender.  My concern is how the IRS looks at the IRAs for distribution.  I dont want my client getting penalized and filing suit against me.  Is my plan to aggregate the 2 IRAs with 1million in each ok to do while pulling the 72t distribution from 1 while allowing the other to defer and eventually pull income at 65?  I read the IRS guidellines and they are confusing.  Does the IRS look to see how much you have in all IRS?  Do they just want to see equal distributions until 59.5 or 5 years, whichever is greater?  This is a case I cannot afford to mess up.



Submitted by Alan - IRA critic on Mon, 2018-08-27 23:33

  • When the IRA balance is larger than needed to generate the desired distribution amount, IRAs are typically partitioned by non reported direct transfer into one or more to be used for the 72t plan and one or more to be kept outside the plan for emergency needs.  The two 1 million dollar IRA accounts can be combined and the 72t distribution calculated using a balance on any day after BOTH annuities have been purchased, since you can only have one account balance day to use for all IRA accounts in the plan. The other 400k IRAs are not part of the plan, and distributions from them will be subject to penalty up to 59.5.  The 72t plan must run the longer of 5 years from the date of first distribution or until 59.5.  As for distributions, you can take the 96,038 (or correct amount) in any combination from the two IRAs in the plan, so your plan is OK. There is also no required distribution pattern, so distributions can be taken monthly, annual, random etc. The only thing that matters is that the 1099R amount exactly matches the documented 72t plan calculation.  Once the plan ends in about 5 years, there are no more restrictions. A form 5329 will likely need to be filed each year to claim the 72t exception, as most custodians will no longer underwrite the accuracy of the plan calculations and will code the 1099R with code 1.
  • Note that while the odds of an IRS challenge are slim, in a couple of cases the IRS has busted a 72t plan for the partial transfer of an account. Therefore, it is not recommended to move any of the two IRA accounts in the plan to another custodian before the plan ends, unless you move both of them. A total transfer is OK, but a partial is problematic.
  • In summary, your plan is OK to start. Then the client needs to be sure not to make any execution errors. If there will be automatic distributions, best to avoid the first or last 7 days of the month to avoid year end errors or oversights on the part of the custodian.


Submitted by Charles Shinneman on Tue, 2018-08-28 15:22

Thank you so much for the response.  I have one clarification.  When I was looking up the 72t reasonable distribution rates on the IRS website, it does state 2.98% was the stated rate and hasnt seemed to increase since 2011.  It also mentions that you can take up to 120% of that number too.  If the client doesnt need 2.98% and wants to use a reasonable distribution of 2.62%, would that be ok? Or does it have to be 2.98%



Submitted by David Mertz on Tue, 2018-08-28 16:30

120% of the highest federal midterm rate for the two months immediately preceding the start of distributions under the 72(t) plan is the *maximum* amount used to estimate the growth rate of the investments in the IRA.  It is not the distribution rate.  One would typically use the highest value permissible for 120% of the federal midterm rate so as to minimize the initial IRA balance needed to produce the desired annual payout.  Using a value of 2.62% instead of the current maximum of around 3.44% for 120% of the federal midterm rate would mean that about an 11.5% higher initial IRA balance in the 72(t) plan would be needed to produce the desired annual payout.



Submitted by Charles Shinneman on Tue, 2018-08-28 21:21

I am using an online calculator to determine the 72t payments.  The website is https://www.calcxml.com/calculators/72t?skn=#results and it has some numbers on there pre-plugged.  Hypothetical rate of return on the investment is 6% and the reasonable distribution rate is 2.62%.  I am using the single life amortization, 2million in IRAs aggregated, client ages are 54 and 51 with 1 year deferrals.  So at 55 and 52 the single amortized amount would be $97,960 annually for the next 7 years (5 by law but we need two extra years for the plan).  I am assuming this would be ok as long as the client takes equal distributions for the next 5 years?



Submitted by David Mertz on Tue, 2018-08-28 21:56

  • The 2.62% value for 120% of the federal midterm rate was the rate for January 2018 and is out of date.  The calcxml.com page’s help (“?”) for that entry has the URL to the IRS’s Revenue Rulings listing the current rates.
  • The calcxml.com calculator refers to the 120% of federal midterm rate as “distribution *interest* rate,” not distribution rate, meaning that it’s the maximum interest rate that can be used for the purpose of calculating the annual SEPP distribution amount.  The “investment interest rate” is used to estimate what the remaining balance in the IRAs in the plan will be over the course of the plan.
  • I suggest using the 72t.net website’s calculator which defaults to the current maximum value for 120% of the federal midterm rate (the July 2018 value of 3.45%):  https://72t.net/72t/Calculator/Distributions


Submitted by Alan - IRA critic on Tue, 2018-08-28 22:31

  • The highest interest rate you can use based on the month of the first distribution is 3.45 for Sept, 3.44 for October and for November the Oct. rate is not yet published, but we know that for Nov first distribution the rate will not be less than 3.44.  
  • Unlike the timing for rollovers which are based on the received day of the distribution, for a 72t distribution it is the distribution date that counts. That will be the date shown on your IRA statement. For that first distribution, it is often critical to know WHAT MONTH the distribution will be made, so it is recommended not to request your first distribution in the last few days of the month, because you will not know for sure whether that distribution will be made in the month you transmitted your request or in the following month due to weekends or holidays.  If you take out the full annual (first year of the plan you can either distribute the full annual or pro rate the distribution by the month  (eg Oct first distribution, you can distribute 25% of your annual calculation), but if you find that you took out too much, you have 60 days to roll back the excess to the IRA if you have a rollover available.  However, it is better to preserve your one rollover if possible for such corrective measures.  The IRS expects your annual 1099R to be for the exact amount, so do not count on any amount being “close enough.”


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