72t Calculation

Submitted by MIKE KRUCHTEN on Fri, 2017-02-24 00:13

Its been some time since I assisted with a 72t calculation and its logistics. I have a 56 year old client with a Trad IRA valued at $700,000 and wants to maximize his monthly income from IRA w/ out incurring 10% Fed penalty. The client has another Trad IRA which would be used for emergency funds should he need more funds vs. taking from from 72t IRA. I think if he were to take a redemption from 72T IRA in 2nd year or within 5 year or age 59.5 whichever is longer it would violate rule and make all penalty free prior redemptions subject to the 10% penalty. Assuming the client starts income March 2017, I believe he must use either the Jan 2017(2.36%) or Feb 2017(2.53%) Federal Mid Term Rate. The rates I quoted were actually the Annual rate but I see there are S/A, Qrtly and Monthly rates thou not very different. For the next questions lets assume Feb 2016 rates are used. To follow the rule exact I assume if the client uses the Feb 2017 rates and takes a monthly draw from IRA he would need to use the monthly rate of 2.34%? Can client use a lower rate than 2.34% to lessen fund coming out of IRA? Can he take more than the 2.34%? Can he recalculate the 72t plan in one year if rates move dramatically higher or is he stuck with 2.34%. Any other insights would be beneficial.



Submitted by Alan - IRA critic on Fri, 2017-02-24 00:59

  • Client can adopt a recalculation plan, but it is not particularly recommended because it will require 5 calculations instead of 1 and the differing annual distributions may attract IRS attention because they rarely see a recalculated plan. A recalculated plan must be adopted on Day 1, the client cannot switch to one starting in a later year.  As for the typical non recalculated plan, client can use any interest rate below the max rate of 2.53, but if 2.53 produces a higher distribution than client will ever need, it is generally recommended to reduce the IRA balance by partitioning the IRA (in this case transferring an amount to the other IRA not included in the plan to increase the access to emergency funds). Of course, such a transfer must be completed before the first distribution date and the account value used for the calculation must be after the transfer out. If the excess dollars are not substantial at this point probably easier to avoid the transfer and either use the full rate or a somewhat lower rate.
  • Would recommend that in the year client turns 59.5, the distribution is taken after reaching that date if possible. If the account was considered busted for any reason, the retroactive penalty and interest only applies to distributions taken before 59.5, so taking the distribution post 59.5 will exclude that one from ever being subject to the penalty. Not a necessity, but advisable if not too inconvenient.
  • To clarify, site 72onthenet does not recognize varying interest rates based on the plan distribution pattern (monthly, quarterly, annual etc) and the IRS has never raised an issue over that position. The published rate or another rate less than that rate should be used regardless of the distribution pattern.

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