72(t) distribution | Ed Slott and Company, LLC

72(t) distribution

I have a client (DOB 7/1966) with $1,500,000 and under the three methods I am coming up with three different numbers - the first method, RMD, $50,670, Fixed Amortization method $87,360 and fixed annuity method $86,850. I am lost. If anyone can help me I would greatly appreciate it. Tommy Blair (516) 352-8800 ext. 1

  • Since each method is calculated differently, the results will generally have the spread you posted with the RMD method generating considerably less. Since the fixed amortization method always produces the highest distribution per dollar of plan balance, this is the option that is normally selected.  The benefit of selecting fixed amortization means that the account balance to generate a desired distribution amount can be lower. With an IRA funding the plan this means if the client has sufficient IRA value, they can partition the IRA into two IRA accounts with one of the account having the exact dollar balance to fund the desired distribution. The other IRA can then be maintained outside the 72t plan and used for emergency distributions or even to fund a second 72t plan at a later date. The RMD method is inferior for two reasons, it generates a far lower distribution and using it to start a plan eliminates the option of the one time switch to the RMD method later if the client comes into some money and wishes to reduce the calculated distribution. 
  • In summary, determine the amount client needs for 72t distributions including future inflation and some unplanned costs. Using the entire IRA balance from all IRA accounts, determine if the amortization method will generate this amount. If the balance is high enough to generate a larger payout, then partition the IRA by direct transfer into some combination of IRA accounts such that one of them will generate the amount needed. Then use only that IRA balance to calculate the allowed distribution (the amount needed) and maintain the other IRAs outside the 72t plan.

 

 

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