72t Questions

Submitted by Michael Imes on Wed, 2020-03-18 17:11

Hi All,

First post.

I have already searched the forums for this subject. And while
I have found some good information, I still want to get to specifics.

Turned 55 in December 2019.

Goal is securing a chunk of money prior to turning 59 1/2, while
having an easier time minimizing the tax burden associated with
taking a larger amount.

I hope to start the distributions PRIOR to end of April, allowing
the 1.8% rate from February. My plan is to take the full distribution
yearly.

My IRA account reports quarterly, so next update is end of March.

Is this enough time to gain the valuation to use prior end of April?

Once I make this calculation, is it OK to make each distribution early
April?

DO I understand correctly that the year 1 amount, is also the year 2-5
(or 6) amount also? No recalculations each year, even though the
balance will most certainly change?

My last mandatory distribution should be in 2025, when I am 60.
Correct? (5 years, 6 distributions)

Would I then be allowed any other distributions in that age 60 year?

Finally, how is the 72t plan ended or dissolved?

Thanks in advance to any who reply.

Stay well,
Michael



Submitted by Alan - IRA critic on Wed, 2020-03-18 18:33

  • If you take your first distribution by the end of April, you can use the Feb rate of 2.10. If you don’t start until May, the rate drops to 1.83. After that the rate will plummet. As for account value, it must be reasonable in relation to the value at the time of your first distribution, which probably means no more than 15% higher than the value upon your first distribution. In the midst of a market crash, hopefully your IRA does not hold too much in stocks or stock funds, not only due to large losses, but the challenges it presents in setting a valuation date due to losses after the valuation date. 
  • Once your plan starts, the distribution pattern does not matter. You can take distributions in a lump sum, monthly, quarterly or just random. The only thing that matters is that your 1099R shows the exact amount of your calculated distribution for the year.
  • You will have a 5 year plan, because you will hit 59.5 before the 5 years is up. If your first distribution is 4/20/2020, your plan ends on 4/21/2025. It is best to take a full year distribution 2020-2024 (5 years of distributions), and then take no distribution in 2025 until after the plan ends. Your distributions will be the same total each of the 5 years, so your initial calculation is your only calculation. An exception is if you make a one time change to the RMD method at some point because you want to reduce the distribution. If you do that, then you will have to do a new RMD calculation every year thereafter. 
  • After 4/21/2025 you can take out as little or as much as you wish, as your plan will have ended. You do not have to report that your plan ended. You would continue to report all distribution on Form 1040 as usual. The only difference in reporting is that you will need to file Form 5329 each year to claim the exception to the penalty, since the IRA custodian will probably use code 1 (early Dist) for all distributions up to 59.5.
  • TIP: If you set up automatic IRA distributions, do not use a date very early or late in the month, and if not automatic, do not wait until the last week of December to make your last distribution. This avoids mistakes at the end of the year that cannot be corrected.


Submitted by Michael Imes on Fri, 2020-03-20 17:58

Thank you Alan. Much appreciated!



Submitted by Michael Imes on Fri, 2020-03-20 18:07

Thank you Alan. Much appreciated!



Submitted by Michael Imes on Fri, 2020-04-10 10:37

  • Thanks again Alan,
  •  
  • This then would NOT permit any other distributions during the
  • term of the 72t Plan, is that correct?
  • So I have effectively “locked in”
  • the balance of my TIRA funds, until the 72t ends.
  • ***
  • I cannot begin a 72t Plan AND take say a 50K distribution same year, right?
  • ***
  • Would using a Dec 31, 2019 account balance number be allowable?
  • (higher balance than currently, obviously)
  • ***
  • I would like to use the 72t as follows.
  •  
  • Yr 1 – Pay off all debts
  • Yr 2-5 – Fund a brand new Roth IRA
  • Would be ideal to fund a NEW Roth, and then start the 72t?
  •  
  •  
  •  
  •  
  •  
  •  


Submitted by Alan - IRA critic on Fri, 2020-04-10 18:35

  • Once your plan begins you cannot take distributions other than the 72t distributions unless you have other plans that were not part of the 72t calculation. 
  •  Am not sure that any corona virus distributions (If you qualify for them) would be allowed in addition to your 72t distribution.  Best to assume not at this point.
  • Would avoid using 12/31 balance if it is more than 15% higher than the value when first distribution is requested. With this week’s rally, if you requested the distribution now, the 12/31 balance might not be too high.
  • You can make new regular Roth contributions, and you can actually convert your 72t TIRA after your annual distribution has been taken, but you cannot convert any part of the distribution to Roth. Best to limit yourself to regular Roth contributions.


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