what balance is used for a 72t distribution?
for the first year of a 72t distribution, what balance is used, the previous year end or a reasonable balance for the current year? will use the minimum distribution method and hear different answers from the accounting profession.
Permalink Submitted by Alan Spross on Mon, 2008-11-17 23:33
Ruling 2002-62 merely says that the date of the account balance must be reasonable. It follows with an example of a July inception date for an RMD method that uses the prior 12/31 balance.
Since the RMD method is inherently more a calendar year method than the amortization or annuitization methods, the IRS would likely agree to a longer time setback on that type of calculation than the others.
Generally, going back more than 6 months raises the chances of a challenge. However, some 72t experts feel that the dollar difference between the balance you elect and the current balance will be just as important as the time span. Using that concern, where a current IRA value is 35% less than an August, 2008 value, the IRS may not consider use of the August balance as reasonable.
Accordingly, to play it safe, I would not go back more than 6 months, nor would I select a date on which the balance is more than 20% different than the balance on the day you order the first distribution.
Since the IRS has not embellished RR 2002-62 further on this subject, you can probably find all sorts of opinions, but this is not something that you should put to too great a test.
Permalink Submitted by mk foss on Tue, 2008-11-18 03:15
As Alan indicated no specific date is required. I’ve seen people do this in a different way. For example, if they need a specific monthly, quarterly or annual amount – they can go to 72t.net and use the backwards calculator to see how large an IRA balance is required. Then they can roll that amount into a new IRA and use if exclusively for the SEPP distributions.
If you’re using method 1 for distributions, they’re reset each year based on the 12/31 balance but most people use method 2 and start with a specific balance. If the specific balance is what you created the IRA with, there would be no problems. Method 3 was very popular before the 2002 revenue ruling – it used to give the largest payment but now method 2 has that honor.