72t RMD One Time Reduction
My client began distributions at age 48. She is still under 59.5 and now wishes to reduce dist to RMD. She has already taken out three distributions which exceed her RMD amount for the year. Can she reduce to annualized RMD now? Can she stop taking distributions all together for the year? Or must she continue her same distribution throughout the year? what are the clients options?
Permalink Submitted by Alan - IRA critic on Tue, 2013-03-12 18:34
If client has already exceeded the RMD calculation for 2013, she could roll back part of any distribution taken in the last 60 days to back into the RMD calculation and have a non pro rated RMD plan for the year. That said, this is somewhat risky because it uses up the one permitted rollover over a 12 month period, and that in turn eliminates the rollover safety value were the client to make an error and take out too much in the next 12 months. Conversely, doing a pro rated mid year one time switch to RMD is not clearly allowed by any IRS guidance. In fact, RR 2002-62 refers to the one time switch as occuring in a “subsequent year” from a fixed dollar year. This suggests that doing a mid year change is inviting attention from the IRS and could result in a busted 72t plan.
Permalink Submitted by Paul Duncan on Tue, 2013-03-12 19:06
Thank you for your input. I was reading SECTION 3. EFFECTIVE DATE AND TRANSITIONAL RULES. It states: If a series of payments commenced in a year prior to 2003 that satisfied 72(t)(2)(A)(iv),the method of calculating the payments in the series is permitted to be changed at any time to the RMD method described in section 2.01(a). Am I wrong to interpret “at any time” to mean midway through the year? It seems to be consistent with the seminal spirit of the onetime change rule.
Permalink Submitted by Alan - IRA critic on Tue, 2013-03-12 19:56
No telling what the IRS means by “anytime”, but keep in mind this reference is related to transition from 89-25 to RR 2002-62. Further, there have been several indications that the IRS considers 72t plans as inherently calendar year plans. While the attached http://www.irs.gov/pub/irs-wd/0419031.pdf PLR includes IRS approval of a rollover in order to make a full CY under the RMD method, it is not directly applicable to your question about a mid year change of method. There have been no letter rulings regarding such a mid year change. although one noted expert felt that the IRS would approve such a request. But all this is subjective and a ruling costs 10k plus legal and a considerable waiting period to determine the result. In summary, no one knows for sure how the IRS would rule in such a request, so I would not recommend becoming the case that determines the answer to this question if there are any other options available. Rolling back the excess appears much less risky since the above PLR indicates approval of that. It’s unfortuneate that the IRS has never written detailed Regs on 72t plans, instead there is a pattern of letter rulings that may or may not be relied on. In some cases, these rulings have not been consistent (eg divorce and 72t plans). It’s always best to avoid IRS scrutiny as much as possible when it comes to 72t plans.