Taking IRA money out before age 59.5

Submitted by Jackie Glissman on Tue, 2013-12-17 18:54

I’m 51 yrs old. 72(t) allows to take IRA money out without penalty. I can’t take any amount I want. This will have to be determined by a “reasonable interest rate” based on the 2 prior months AFR rates (mid-term). I’ll commit to the same withdrawal every year for the next 9 years. However, if I change the amount even slightly from year to year I’ll then be subject to a retroactive 10% penalty plus interests.
Question:
How can the amount to be withdrawn be the same every year if the IRA money is invested in the Stock market which fluctuates all the time? Then the “reasonable interest rate” will be applied to the remaining balancce in the IRA resulting in a different amount to the first withdraw.
A CPA told me that by using the Required Minimum Distribution method the “reasonable Interest Rate” will not apply and I would only have to divide the IRA’s capital ending balance of the previous year, by the life expectancy (33.3 as I’m 51 yrs old) and the result will be the amount I’m allowed to take out every year.
But even in this case, the IRA money is invested in a volatile market where the year end balance will differ from year to year depending on how the stock market goes.
This fluctuation will incurr into retroactive penalty fees plus interest because the withdrawals will be different every year.
How can I determine how much to take out of my IRA? How do I know if I need to apply the “reasonable interest rate” or not?, how can I prevent the fluctuation of the IRA’s capital and avid penalties without having to move into a fixed money market?
Any advise will be greately appreciated.



Submitted by Alan - IRA critic on Tue, 2013-12-17 21:57

  • There are 3 IRS approved methods to calculate a 72t plan. The fixed amortization method and the fixed annuitization methods result in the same annual distribution for the entire term of the plan. There are no required recalculations of the annual distribution and fluctuation of the IRA value is immaterial.
  • Conversely, the RMD method requires an annual calculation using the prior year end balance and age attained by the end of each year. The annual distribution will fluctuate. It is also important to note that the RMD method produces a far lower annual payout (perhaps 40% less than the other methods) assuming no change in the account value. Therefore, the RMD method is not the method to start out with. However, there is a one time switch allowed from a fixed dollar method to the RMD method if taxpayer wants the payout reduced.
  • The best way to establish your plan is to determine how much you need each year, padded for inflation and contingencies. Then use the fixed amortization method, single life expectancy and the highest allowable interest rate to determine the payout. If the payout is more than you need, for example 30% more, then partition your IRA into two accounts, with the amount you need for the plan in one IRA and the other IRA can be used for emergency needs to help insure that you will not bust your plan. If today’s low interest rates along with your max account value produces an insufficient amount, then you are at a high risk of busting your plan. Right now, the max calculation is less than 5% of the account value, so if you need 50,000 per year you will need an account balance of a little over 1mm.
  • The IRA account used for the plan can be invested any way you wish and the fixed dollar methods will keep your distribution level. Even if the IRA runs out of money, you are not penalized, but of course you have other problems.
  • Visit this site for a thorough review of 72t plans including planning pointers:  http://www.72t.net/72t/Planning/Pointers

Submitted by Jackie Glissman on Wed, 2013-12-18 16:30

Hello Alan,Thanks a million for your input. My IRA is with one single custodian and it is divided in two: 1/4 in a low risk portfolio and 2/3 in volatile ETF (GLD). As you can imagine the value of my IRA has dropped by half since 2011.A new broker taken out of Ed Todd’s website said I should first move both IRA’s out of TDAmeritrade and put it into American Funds (never heard of this one before). Then he will first have “set up the 72(t)” before I can make the 1st withdraw. a)Is this true? b)Have you heard of American Funds?

Submitted by Alan - IRA critic on Wed, 2013-12-18 21:43

American funds is large and well thought of, but they offer mostly active funds with much higher expenses than index funds would have. TD or any other broker or mutual fund could hold the IRA for a 72t plan. These plans are basically between the taxpayer and the IRS, but some firms can provide more support than others. Yes, it is best to have the IRA custodian in place before starting a plan, because rollovers and transfers can complicate plan administration.

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