72t question on calc method and mid year start
Greetings, I have a client we are planning to start a 72t distribution mid year (Aug). We are going to split her IRA to back into the account balance needed for a specific income amount. I wanted to use the RMD calc method but the IRS definition states that an “end of previous year balance” is used in the calculation. At the end of the previous year, all the assets were in her 401k and not the balance we need for the targeted monthly income amount.
So my questions are:
1) Can I still do the RMD method and use the beginning account balance mid year after we do the split of the IRAs? since there was no balance in this IRA at previous year end.
2) If yes, does the entire calculated amount have to come out in 2024 or can we do it over a 12 month period into 2025? Say from 8/1/2024 to 7/1/2025?
3) Or should I just redo the calculation based upon one of the other two calc methods?
Thanks,
Rick C
Permalink Submitted by Alan - IRA critic on Wed, 2024-07-03 14:00
The RMD method is inferior to the fixed amortization method because it produces a lower calculation that would result in a lower amount having to be partitioned from the other IRA to hit the target. That leaves more in the other IRA. It also would require a new calculation every year greatly reducing the risk of error and predictability of the annual amount, it eliminates the one time switch option to the RMD method should the current method generate too high a distribution, since obviously the client is already using RMD. Finally, for fixed amortization the likely higher balance at the end of June will further increase the calculation compared to the 12/31 balance.
These plans are annual plans, and while they can start at anytime, the IRS will be looking for the 1099R to match the calculation.
For 2024 client has a choice to distribute in August and later either the entire annual calculation or pro rate by the month and take out 5/12 of the annual calculation.
If despite the above, client still wants the RMD method, the balance cannot be based on last 12/31 since there was no IRA balance then and more basically, since the IRA is being partitioned the balance must be after the partitioning has been done and after any prior distribution this year.