72t changes
I have a client that turned on a 72t distribution 5 years ago in 2004 at age 42.
The account value was about $120k at this time and she has been taking out $10k per year($833.33 per month).
The account is now at $64k. She wants to move the account to a new IRA with no prior balance.
Can she adjust the 72t payment amount to be based on the $64k deposited amount with the new custodian or must the original
$120k value be used with a $10k distribution continuing?
Permalink Submitted by Alan Spross on Thu, 2009-07-16 05:16
Bigger problem is that the initial distribution appears way too high even using the highest available interest rate for any month in 2004. The max distribution would be under $7,000, so she may have a busted plan from the start. How did anyone arrive at an annual distribution amount of $10,000?
Other than that, she could do a total transfer to a new custodian and make a one time switch to the RMD method. It is best to do these switches effective January 1st, which probably means next January unless she has taken out so little so far in 2009 that she could make it effective Jan, 09. That would reduce the annual distribution by a massive amount, perhaps not even enough to meet her needs.
This is a tough decision, and starting a plan that must last 17 years is very rare. In her case, the tough decision is whether to declare the plan busted from the start and pay the penalty and be free to start a new plan now or roll the dice and take the chance the IRS will not ask about this for 12 more years. The question has been posed whether after a one time change to RMD, if the IRS later busts the plan, will they charge the penalty on the proper RMD method years or not? Don’t know the answer to that, but she would be better off getting a request to justify the RMD distributions if she gets those correct than explaining the 10,000 distribution back to 2004.
Permalink Submitted by Grant Segal on Mon, 2009-08-24 15:10
Thanks for the reply. I am not sure how the $10k number was calculated either. This was advise from a former advisor and I am now trying to sort through the prior decisions that were made. Just to clarify, moving the assets to a new custodian she would have the option of doing the RMD amount on the new deposited lower amount of $64k or would this be calculated on the original deposited amount with the prior custodian of $120k?
Permalink Submitted by Alan Spross on Mon, 2009-08-24 20:55
If assuming the plan is still valid, the one time switch to the RMD method will apply the appropriate IRA balance for the RMD calculation. The 120,000 original balance would no longer matter. It is best to do the RMD change effective with a calendar year, ie 1/1/2009 if too much has not already been distributed for a 2009 RMD calculation using the IRA balance on 12/31/2008.
While the IRS has not specifically stated that a mid year change to RMD would NOT be allowed, since 72t plans are effectively calendar year plans, it would be risky and invite IRS questions. The date of actual transfer to a new custodian does not affect these other variables, including the effective date of the one time switch. All the transfer does is creates a second 1099R for the year of transfer and the two 1099Rs must add up to the exact correct amount after accounting for the one allowed 60 day rollover to correct an error. Eg if 7,000 is the correct 72t calculation and the two 1099R forms show that 8,000 was distributed, if a 60 day rollover for 1,000 is done to reduce the gross distribution to 7,000, that is OK. It is also a reason to preserve the one available rollover per 12 month period by making any other changes of custodian by direct transfer because they do not count as rollovers.
Permalink Submitted by Grant Segal on Tue, 2009-08-25 13:20
Thank you for your response. This is a great forum to get solid answers in an every confusing and changing world.