changing calc methods on 72t from amort to life expectancy
if a client has been taking distributions under the amortization method under 72t on a monthly basis & is now exercising her one time option to convert to the life expectancy method in the middle of the year, do we have to subtract the payments she’s received so far this year from the annual amount to determine how much she can receive for the remainder of the year? for ex: she’s 57 & she’s taken 15k so far in 2010 distributions. We calculate that her annual amount under the life expectancy method (based on 12/31/09 balance) is $14,281. Is she prevented from taking distributions for the balance of 2010 or can we divide $14,281 by 12 & take 6 months @ 1191 per month, then recalc for 2011 based upon 12/31/10 balance? Thanks.
Permalink Submitted by Alan Spross on Tue, 2010-07-13 01:44
While using a pro rated annual figure is not expressly forbidden, the examples published by the IRS all contemplate the effective date of the one time switch to the MD method to be based on a full calendar year. Therefore, it is less risky to avoid the pro rating of methods, and to subtract the amount already distributed in determining how much remains for the calendar year. In the situation where the taxpayer has already exceeded the MD method the solution would be either to wait until the following year OR to roll back excess amounts if the 60 day rollover rules permit a roll back of the excess amount.
Examples published by the IRS also permit the use of a mid year account balance even though the methods themselves are not pro rated. Their example shows a 9/30 account balance used for the MD calculation but retroactive to January 1 to the year of the one time switch. For the following years, the 12/31 balance for the prior year is used to calculate the new annual distribution with the age updated.
It is also possible to change the individual vrs joint life assumption when the one time switch is calculated. Changing from an individual to a joint life with beneficiary calculation will result in an additional reduction in the new annual 72t distribution.