72t and Immediate Annuities

Submitted by Brady Smith on Tue, 2014-07-22 13:44

Can a period certain only immediate annuity be used to make the substantially equal payments of a 72t distribution plan while the remainder of the IRA stays untouched, as long as the payment is the amount calculated using one of the three methods? Will this work even if the remainder of the IRA fluctuates in value through the years until the longer of 5-years or until age 59.5? What could go wrong here? (Assume an IRA value of $361,000, age 54 at end-of-year, maximize the amount)



Submitted by Alan - IRA critic on Tue, 2014-07-22 18:20

Yes, this can be done. Typically, taxpayer would determine the distribution needed to live on until the SEPP terminates, partition off the amount the annuity company needs to generate the EXACT payout into an IRA annuity, and then carefully document the calculations showing the initial account balance of both IRAs as of the same date and before the annuity is purchased. The non annuity IRA cannot make distributions or receive contributions until the SEPP terminates, although investment changes can be made. In the last year of the SEPP, the annuity payout should be pro rated by the month until the SEPP terminates.



Submitted by Brady Smith on Wed, 2014-07-23 13:12

I’m hearing from others (one is tax counsel for an insurance company) that the IRS treats each IRA account (defined by the generation of Form 1099-R) as separate for 72t distributions and, therefore, a period certain SPIA is extremely likely to pay out more than the maximum. Is there any evidence (private letter ruling or similar) for or against this position?  Also, what do you mean by “annuity payout should be pro rated by the month until the SEPP terminates”?



Submitted by Alan - IRA critic on Wed, 2014-07-23 18:16

Point 1 is copied from the 72tonthenet website, the preeminent website dealing with 72t plans:

    1. Q. Do All IRA Accounts have to be combined to determine the amount of the distribution? A. Individual retirement plans do not have to aggregated for purposes of calculating these payments. If a taxpayer owns more than one IRA, any combination of the taxpayer’s IRAs may be taken into account in determining the distributions by aggregating the account balances of those IRAs. PLR 9050030. Also review PLR 9525062. It also deals with using multiple accounts to fund a single SEPP.

              2.The final year options are withdrawing nothing, the full amount, or an amount pro rated by the month. Monthly payments meet the last option, but if the annuity was paying quarterly payments and the plan ended in May, you would only have 3 payments made before the plan ended.



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