Mechanics of 72t

Submitted by Janis Sleeter on Wed, 2018-01-17 22:55

We have a client who is 58 years old and wants to retire now. We have tried to talk him into waiting until he is 59.5, but haven’t had any luck with that.

He will get about $800,000 from an ESOP this year and about $1.2 million next year. The only other asset is a $30,000 Roth. He needs about $70,000 annual income. We will investigate borrowing options if the answers to this are too unfavorable.

The IRS language has been somewhat confusing about substantially equal payments for how long, and how long it would be before he could change that. Reading the IRA website, it looks like the annual distributions are based on remaining lifetime. Also, I remember something about doing that for 10 years, and it looks like 5 now before you could change the distributions. Also, could we set-up 2 IRA’s with the 72t only applying to one.

Would appreciate some help clarifying the current mechanics.



Submitted by Alan - IRA critic on Thu, 2018-01-18 00:38

  • Having his entire retirement in a single stock in a single stock is terribly risky and should be keeping him awake at night, so his primary concern should be how fast he can diversify these shares rather than worrying about a 10% penalty which is less than 1% of the ESOP FMV. Are these distribution amounts his only option?  Does he know the cost value % of FMV in order to be able to assess taking a lump sum distribution as soon as he can and apply NUA for these shares? 
  • If 800k is the most he can receive this year, he could do a direct rollover of 730k to an IRA and sell the shares right after the IRA rollover. The other 70k he could have transferred to a taxable brokerage account, then sell the shares and use that for the 70k he needs. There is no penalty for the 70k distribution as he qualifies for the age 55 separation exception. No penalty means no need for an inflexible 5 year 72t plan.
  • If he cannot receive the other 1.2mm until 2019, he could wait until he is 59.5 which is a new triggering event for NUA purposes should his cost basis be very low. He could then have the remaining shares transferred to the brokerage account to complete his LSD, then sell all or most of the remaining shares. He would owe ordinary tax on only his cost basis and the lower LTCG rate on the rest. Or if the cost basis is not real low, he could do another IRA direct rollover of 1.13mm to an IRA and have 70k of shares transferred to the brokerage account to complete the LSD. He could then sell those shares and pay ordinary tax on the cost basis per share and the CG rate on the gain. This produces another 70k in cash but saves on ordinary taxes to the extent of the lower LTCG rate vrs ordinary income marginal rate
  • So several options, but the first step is determining what his cost basis % is and if he has any other options for receiving the shares other than the 800k/1.2mm split. If he cannot get the 1.2mm out until 2019 that means another year holding 60% of his assets in a single stock.
  • Anyway, even if NUA does not pan out, it appears the age 55 separation will eliminate the need for a 72t plan.

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