72t Calculation Options

Submitted by Scott Cousino on Thu, 2010-04-29 21:02

Here’s the scenario: 43 year old male married to a 30 year old female with a total IRA value of ~$1.5M looking to retire this July and would like to withdraw $100k per year in his SEPP. Estimating that the 120% mid-term AFR will be 4% at that time still only gets us to $75,249 per year. So, the questions:

1. Are there PLRs or other special circumstances that allow us to use a higher “reasonable interest rate” for the calculation?
2. If the client chooses to roll the entire qualified asset into a SPIA, will that be treated as a SEPP and avoid the 10% penalty for early withdrawal?

This seems like an extreme case, but the gentleman is adamant about retiring ASAP and we’d like to build a case that can support him even if that means telling him ASAP is still a few years away. Thanks for your input!



Submitted by Alan Spross on Fri, 2010-04-30 04:13

1. No, and based on the current 120 mid term rates, 4% seems a little high for an assumption for July.
2. Yes, and for life annuities the insurer is allowed to use their own mortality rates and interest rates. Therefore by checking around he might find a company that produces a higher annual distribution than for a non life annuity SEPP plan. For added safety, a letter guaranteeing compliance and a 1099R coding of “2” in Box 7 until age 59.5 is advisable. The IRS will not question this if the 2 code is used.

That said, locking oneself into a life annuity at this age particulary at a time of almost record low interest rates is not advisable. Even a standard SEPP plan must run for 16 years, but that is better than a life annuity. Some projections would have them using half of that 1.5mm for their remaining healthcare expenses alone. In addition, his SS benefit will not be impressive. This is not so bad if the spouse will have a good career. Otherwise, he will be taking out 6.7% annually and that is simply too much unless there are special circumstances here, eg an inheritance or other assets.



Submitted by Scott Cousino on Fri, 2010-04-30 15:03

Alan, Thank you for sharing your expertise and feedback. Your concerns are well-founded and are consistent with ours. Thanks again!



Submitted by [email protected] on Fri, 2021-10-08 17:20

Does adding a term certain period of years to a SPIA change whether it would qualify under SEPP to avoid 10% penalty?-m



Submitted by Alan - IRA critic on Fri, 2021-10-08 18:00

How are the 72t distributions being made, are there other IRA accounts involved? 



Submitted by [email protected] on Fri, 2021-10-08 18:13

Segregating $100k from total IRA to its own IRA SPIA.  client is 58. I understand SPIA not optimal but not my decision. 



Submitted by Alan - IRA critic on Fri, 2021-10-08 20:53

If the plan is already active and a fixed dollar method is used (ie. not the RMD method), the annual distributions must continue in the same amount between both accounts. In other words, if the annuity distribution is reduced due to amending to a term certain, then the difference must be made up from the other IRA. The IRS has busted a SEPP in the past for a partial transfer, but the chances of that happening are very slim given the thousands of plan that were not busted. Generally, it is preferable to keep these plans as simple as possible without complicating issues, but that will not be possible with this annuitization of part of the IRA.



Submitted by [email protected] on Fri, 2021-10-08 21:15

I’m a little confused. Let me set it up again. Client has $900k in his IRA. Wants to segregate 100k into a separate IRA and buy a SPIA with it. This should satisfy SEPP requirements on that 100k. The wuestion is if they put a term certain on the SPIA at  initial set up. Does that violate SEPP rules?



Submitted by [email protected] on Fri, 2021-10-08 21:44

I apologize. Should have started new thread. I just searched for my answer and this thread was close. 



Submitted by Alan - IRA critic on Fri, 2021-10-08 23:12

There is no existing SEPP?  If not, the purchase of an SPIA in an IRA will not qualify as a “substantially equal periodic payment” because the distributions are not calculated using one of the 3 approved methods outlined in RR 2002-62.  Rather, the annuity payment is figured from the insurance companies mortality tables, and therefore it does not matter whether there is a period certain or not.
Note that there is a penalty exception for a non qualified annuity “immediate annuity” per Sec 72q(2)(I), however 72t, which applies to IRA accounts does not provide such an exception. Therefore, for an IRA to qualify for SEPP distributions, one of the 3 approved methods must be used to determine the distribution amount.
Knowing this, my prior posts referred to a possible existing SEPP in which an SPIA IRA could provide part of the annual distribution figured using one of the approved methods and the entire account balance, with the balance of the distribution coming from the other IRA. But a free standing SPIA IRA does not qualify on it’s own due to failure to use one of the 3 approved methods.



Submitted by [email protected] on Sat, 2021-10-09 11:08

Ah, ok. Thanks for clarification. I misunderstood the “annuitization method” to include a SPIA. thank you. -m



Add new comment

Log in or register to post comments