72t calculations – can i designate a “72t IRA” account or do you have to use all IRA account balances?

Submitted by Michael Neuenschwander on Tue, 2020-12-15 21:37

I have a client wanting to start a 72t ira distribution for tax reasons. Retired early and wants to begin reducing the IRA by using the 72t to “fill up” the 10% and 12% tax brackets (vs. living only off after tax money now and having to use only the IRA later at potentially higher future tax brackets).

If they want to withdraw $30k from their IRA using 72t rules, can they work backwards to calculate the amount that need to be in that separate, designated 72TIRA. Leaving the remainder of the IRA in a separate account unaffected / encumbered by the 72t rules.

If they have to use their entire IRA balance, the 72T would produce more than the desired income. I also read in a few places that the 72t calculation gives you the “maximum” allowed withdrawal. If they have to use all IRA account balances for the calculation, can they just voluntarily take less than the maximum… just don’t exceed the maximum?



Submitted by Alan - IRA critic on Tue, 2020-12-15 22:44

  • The entire balance of an IRA must be used in the 72t calculation, but the IRA can also be partitioned into two or more IRA accounts, one of which holds the exact balance needed to fund the desired distribution amount. Client can use a 72t “reverse calculator” such as the one posted below that will generate the account balance needed to fund a specific 72t calculation.
  • Minimum Balance Calculator – 72tNET
  • Note that the calculated amount must be distributed in the exact amount. It is not a maximum amount which allows distribution of a lesser amount.

Submitted by Michael Neuenschwander on Fri, 2020-12-18 14:59

When you say the “entire balance of the IRA must be use, but then you say the IRA can be partitioned into two or more accounts”… let me make sure i’m understanding. So in this case the client has 1.8 million in IRA accounts and is age 52.  If they only want to take a 30,000 distribution that works out to roughtly $745,000 needing to be in the 72t IRA.  Can they put 745k in a seperate IRA account and they do the 72t from that account for $30,000?  Or they have to include the entire 1.8 million in the calculation, but its ok to take the distribution from only one account (much like a normal RMD is calculated) If they have to include the entire 1.8 million can they use less than 120% of the mid term rate?  This is the language I keep seeing:  “The Reasonable Interest Rate is defined as less than or equal to120 percent of the Federal Mid-Term Rate”  So it sounds like you could use a lower rate to calculate the payout to be less?

Submitted by Alan - IRA critic on Fri, 2020-12-18 19:33

  • The recommended way to do this is to partition the large IRA into two accounts, one for 745k to fund the 72t plan and generate the desired distribution amount. Obviously, this must be done before the 72t plan has started, so that only the 745k IRA is used in the calculation. The remaining IRA is totally outside the 72t plan and does not affect the plan in any way. Contributions and non 72t distributions (subject to penalty) could be taken anytime from the non 72t plan IRA account.
  • You can use a lower interest rate than the max rate, but rates are so low now, that will not reduce the calculation. It is also beneficial to use the lowest balance IRA as possible for the plan since that will leave a higher balance IRA account outside the plan. The non 72t account could also be used later on to set up a second plan if necessary due to the need for higher distributions. That IRA could be partitioned again to generate the ideal balance for the second plan. A larger non 72t plan therefore provides added future flexibility.

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