72T Distribution when market is down

Submitted by Nelie Cruz on Tue, 2022-03-15 20:18

Good afternoon. I was planning to start a 72T distribution supposedly this March 2022, but due to market volatility I am dilly dallying in setting it up with my IRA custodian.

My concern is that if let say I started it now, when the value of my investment is so down, but after a couple of months the market recovers, and the value went up. What will be the effect of this change to my 72T?

I am looking forward to your reply.

Thank you so much and regards.



Submitted by Alan - IRA critic on Tue, 2022-03-15 23:45

The IRS expects that the balance used to compute your 72t distribution be “reasonable” in relation to the balance on the date of your first distribution. While “reasonable” has never been defined to the %, you would probably be OK using a month end balance that is no higher than 15% more than your current balance. Typically, using a 12/31 or 1/31 balance would be OK, but if you are down over 15% from 12/31, then look at your 1/31 balance to see if that is within 15%. Then make a copy of the month end statement you are using for your opening balance and keep it with your calculation of the distribution.
You are also getting a huge break due to the issue of IRS Notice 2022-6, which allows you to use 5% as your interest rate for a plan starting in 2022, and this will generate a much higher distribution per dollar of IRA balance than the current much lower 120% mid term rate. Together with the flexibility for your opening account balance, you should be OK compared to the former rules used with a higher balance. You should google Notice 2022-06 before proceeding.
You should use the fixed amortization method with the single life table as this generates the largest distribution per dollar of account balance as well. This is a one time calculation and fixes your annual distribution amount regardless of where your IRA balance goes. If the market recovers in a couple years, it just means that once your plan ends in 5 years or age 59.5, whichever is longer, you will have more left for retirement. 

Submitted by Nelie Cruz on Wed, 2022-03-16 17:23

Thank you so much for your explanation! Much appreciated.

Submitted by Nelie Cruz on Wed, 2022-03-16 17:52

If I’d rather use the lower 120% mid term rate vs the 5% rate as per 2022-6, that is OK too, correct? Because I don’t want to go over the Covered CA treshhold and not qualify for the premium tax credit anymore. Or can I specifically choose the portfolios to be included in the balance on which the calculation will be based? (Although this seems like it’s complicated). Which do you think is the best approach? So I can come up with the desired amount of the annual payment?As always, looking forward to your reply. Thank you so much!

Submitted by Alan - IRA critic on Wed, 2022-03-16 19:57

You can use a lower rate to reduce your distribution, but the much smarter decision is to use the max rate you can, and to the extent that produces a higher distribution than you wish, you should partition your IRA by direct transfer into two accounts, one for the 72t plan holding the amount that generates the distribution you want, andn the other IRA outside the plan that you can use later on for emergency needs to avoid busting your 72t plan. Or you could even use the other IRA outside the plan to start a second plan down the road if you determine that you will regularly need a higher distribution. This provides insurance against busting your plan that you would not have if your entire IRA was used for the plan with no other emergency source. Again, you would partition the plan before taking your first distribution and you could not use an account balance dated prior to the partitioning. 

Submitted by Nelie Cruz on Wed, 2022-03-16 20:31

Again, thank you so much for your advise!

Submitted by Nelie Cruz on Thu, 2022-03-17 15:39

Good morning! I am really glad that I can get advise from you. I will follow your advise as it is the smart thing to do. I will divide my IRA account and make a separate account for the 72T. My IRA custodian does not seem to know about the 2022-6 so I was a bit disappointed.Another question I have is: once I have the 72T account started, can I still rebalance the portfolios I have within this account? can still do the usual selling and buying of stocks if I need to? I know I cannot transfer money to or transfer money  from this account once 72T started, but the usual trading within this account, is it allowed? Will I still be able to this within my 72T account? Looking forward to your reply. Thank you so much again, and again! 

Submitted by Alan - IRA critic on Thu, 2022-03-17 16:47

Yes, you can change your portfolio as often as you like in the 72t IRA. What you cannot do is take any distribution that is not considered a 72t distribution or do rollovers or transfers in or out of the account or make new contributions to the account. 

Submitted by Nelie Cruz on Thu, 2022-03-17 19:14

Thank you so much for your quick reply! I am learning so much from you!

Submitted by Nelie Cruz on Mon, 2022-03-21 19:06

Good afternoon! Just spoke with the Retirement advisor at Fidelity. She has heard about the new IRS notice 2022-6 but their system is not updated as to the 5% interest rate and only allow the 120% midterm rate. She told me to consult a tax expert to calculate the distribution myself and just fill out the form with the calculated amount of the distribution. They will also code my distribution to “1” and not “2”.Do you have the link to a  72T calculator that is the most accurate? Since those at Fidelity at not very helpful I really need to seek your expert advise to make sure that my 72T plan is perfect. As I am starting my 72T plan this year, I have to get equal payments for 2022 – 2026. If I start it this April, it will end April 2027, correct? And I am not supposed to get anything in 2027 until April 2027 is over? After April 2027, I can withdraw any amount. This is my understanding and I need your confirmation. Again, thank you so much for your help. Looking forward to your reply.

Submitted by Alan - IRA critic on Mon, 2022-03-21 20:45

I suggest using two current calculators that are updated with the new IRS RMD tables for 2022. Two of these are dinkytown.net and 72t NET. Enter your 5% interest rate and the single life RMD divisor (or your age if requested instead). Enter your initial account balance. Make sure you get the same answer for each calculator. Another popular calculator has been at bankrate.com however bankrate has not yet updated to the new RMD tables, so you cannot use theirs yet.
What is your DOB and intended start month?  Since your plan is apparently a 5 year plan (first distribution is after age 54.5), you generally will distribute the full annual amount in the first year (2022) instead of pro rating. Then you would NOT distribute anything in the final year, resulting in 5 equal annual payments 2022-2026. In other words, no distribution in 2027 until after the plan has ended 5 years and 1 day after receipt of your first distribution. 

Submitted by Lia Bertelson on Tue, 2022-03-22 15:08

I am going to start a five year SEPP plan on April 1 with dob 11/7/1965. Can I do a monthly distribution beginning April and continue monthly payments for five years, or is it safer to do an annual amount? I see your comment here about not pro rating.

Submitted by Nelie Cruz on Mon, 2022-03-21 21:02

My date of birth is August 22, 1966. I am planning to start my 72T plan either next month or May this year. Thank you so much as always.

Submitted by Alan - IRA critic on Mon, 2022-03-21 21:14

Ok, that confirms that you will have a 5 year plan since you reach 59.5 prior to the date 5 years pass. Above comments about the 5 year plan apply. In 2027 you should not take any distribution prior to plan ending, but can take any distribution after it ends.
If something adverse occurred and you busted your plan, your penalty would only apply to distributions taken prior to 59.5. Since you reach 59.5 on 2/22/2026, I suggest that you take your 2026 final distribution after 2/22/2026 so no matter what you would not owe a penalty on it.
Almost all IRA custodians will code distributions taken prior to 59.5 with Code 1 because they do not feel capable of underwriting the accuracy of your plan. That forces you to override the penalty by filing Form 5329 and showing exception code 02. If you take your final 2026 distribution after 59.5, that 1099R will be coded 7 and you will not need a 5329 for that year. 

Submitted by Nelie Cruz on Mon, 2022-03-21 21:39

I just tried the Dinkytown.net and 72Tnet. And I got the same amount of distribution. The only difference is that, with Dinkytown, there is no cents or decimals, whereas with 72Tnet, there is. I also tried Bankrate, and you are right. I got a different amount from this site. You have been really very helpful and I cannot thank you enough for all your help. I don’t know what to do if I did not come cross your site.  I think now, I know better than any of the representatives at Fidelity regarding 72T distribution. I owe it all to you!Thank you so much! Again and again and again.

Submitted by Nelie Cruz on Mon, 2022-03-21 23:38

I am curious. What are the adverse occurences that can possibly bust a 72T plan? So I can definitely avoid them.Looking forward to your reply. Thank you so much!

Submitted by Alan - IRA critic on Tue, 2022-03-22 15:41

Error in original calculation. (Acct balance, interest rate, age)
Execution error in taking distributions (too much or too little).
Transferring other plans into the 72t account or rolling an amount out of the account to a non SEPP account.
Making the plan too complex for the IRS to easily understand, even if legal. You do not want to attract their attention. 
Failing to file Form 5329 if needed to claim the penalty waiver.

Submitted by Nelie Cruz on Tue, 2022-03-22 18:43

Good morning once again! I have already opened another IRA account to which I will transfer the portfolios from which I will base my 72T calculation. I am just waiitng for month end to do the transfer as I don’t know yet how much will be the values of my portfolios at that time. As for the interest rate, I am going to use 5% as per IRS notice 2022-6. As for the age. Since my DOB is 8/22/1966, I am now 55 and 7 months old. So when I use the Dinkytown.net website, I will use 56 as for my age, 60 for my beneficiary, (my sister’s age) but will choose single life expentancy to get the 72T calculation. I understand that this will be the yearly fixed amount.  I plan to withdraw annually so it’s easy to monitor. And I will use the exact amount that will come out of the calculation. Will it bust the plan if let’s say on the first distribution I use a higher tax rate for the withholding? And then later on if I realize that it is too high, can I lower the tax rate for the following year? Or whatever the tax rate from the beginning, it should be the same for all future years?Looking forward to your reply. Thank you so much, as always! 

Submitted by Alan - IRA critic on Tue, 2022-03-22 19:54

You can vary the withholding % from year to year or even within a year. Just remember that for plan purposes, it is the gross distribution that matters, not the net of taxes amount.  You can also vary the distribution pattern and frequency but the total gross distribution as reported on Form 1099R is what matters for your plan.

Submitted by Nelie Cruz on Tue, 2022-03-22 21:14

Thank you so much!

Submitted by Lia Bertelson on Tue, 2022-03-22 17:15

I am going to start a five year SEPP plan on April 1 with dob 11/7/1965. Can I do a monthly distribution beginning April and continue monthly payments for five years, or is it safer to do an annual amount? I see your comment here about not pro rating.

Submitted by Alan - IRA critic on Tue, 2022-03-22 18:18

5 annual distributions is safer for a 5 year plan, probably because in the early days there was the perception that a 5 year plan should be limited to 5 calendar years, not 6. Pro rating became popular later on. In addition to the number of distribution years with 1099R forms issued, there is the risk of taking out 60 different distributions. If you still wanted to do that, I would suggest setting them up for mid month, nowhere near the start or the end of any month, because that is too risky come Dec- Jan with Holidays etc. 

Submitted by Nelie Cruz on Fri, 2022-04-01 00:08

I used the two links that you suggested above. And with Dinkytown.net, I got. while in using 72T Net, I got  Which one should I use? Will it matter a big deal if I use the one from Dinkytown.net, since it is rounded? This is the one where I can easily print the report or result. The one from 72T Net does not produce a good or readable report.Thank you again!

Submitted by Nelie Cruz on Fri, 2022-04-01 00:26

Another question that is going thru my mind. I have several beneficiaries in my IRA account but I only use the age of one. The age of the beneficiary will not matter since I am going to use the single life expectancy, right? I just want to amke sure. I need to check and double check everything with you since I cannot rely on the advisors at my Investment company. They are not very helpful. Once again, Thank you so much! I am looking forward to your reply so I can call them tomorrow and start the plan.

Submitted by Alan - IRA critic on Fri, 2022-04-01 01:06

Correct, use the single life expectancy table and ignore the ages of the actual account beneficiaries. You can also use the dollar rounded dinkytown calculator with your selected account balance.

Submitted by Nelie Cruz on Fri, 2022-04-01 01:11

Thank you so much!

Submitted by Nelie Cruz on Fri, 2022-04-01 02:09

One last double checking. I made the transfer of my portfolios to a separate IRA account for the 72T plan on March 28, 2022 and I added another portfolio yesterday, March 30, 2022 since the market went down. And the balance I am going to use is the balance ending March 31, 2022. I am going to start the 72T on April 7, 2022. Is the balance as of March 31, 2022 the right one to use? Or do I need to delay my 72T plan for another month since the transfer is very tight or very close to the valuation date?

Submitted by Nelie Cruz on Fri, 2022-04-01 02:16

I apologize if I keep asking seemingly same questions but I just want to keep double checking as I do not want to make a single mistake in my 72T plan. Please bear with me. Again, thank you so much!

Submitted by Alan - IRA critic on Fri, 2022-04-01 02:27

You can use the 3/31 closing balance as long as you do not add new money to the account or take a non SEPP distribution from the account prior to your first SEPP distribution. Just investing money already in the IRA is not treated as adding new money or taking a distribution, so internal investments are OK on any date. Make sure all intended rollovers you requested have been made to the account before determining your balance or your first SEPP distribution date.

Submitted by Nelie Cruz on Fri, 2022-04-01 02:35

Thank you, thank you, thank you!

Submitted by Nelie Cruz on Fri, 2022-04-01 11:44

I forgot that there would be interest posted as of end of month. I printed the balances as of yesterday thinking that that would be myfinal balance for the 72T calculation. But the thing is, since I made the transfer from one IRA account to the new IRA account for the 72T, the interest posted in the original IRA account and not the new IRA account where the portfolio is now in. It is now April 1 and I am not sure if I should transfer the interest to the new IRA account or just leave it in the original IRA account.But if I will transfer the interest today then I will mess up the ending balance for March 31, right?Please advise.  Looking forward to your reply. Thank you so much!

Submitted by Nelie Cruz on Fri, 2022-04-01 11:53

I thought of calling today to start the 72T plan but I guess it is best to wait for the statement to be generated before I do the calculation as who knows, there might still be some interests that will be posted to the account. As per the representative. it will take 3 days for the statement to be generated. So I guess I have to wait till then.

Submitted by Alan - IRA critic on Fri, 2022-04-01 14:14

Leave the interest in the original IRA account where it posted. As of your 3/31 statement for the 72t account, be sure to flag your 72t account that you can no longer transfer money into or out of the account other than your 72t distributions. If you have more than one IRA outside the 72t IRA, you can move funds between those other accounts, but not to or from your 72t account. I agree that you should wait until the 3/31 statement is generated for the 72t account, and use that as your opening balance on which to calculate your distribution. 

Submitted by Nelie Cruz on Fri, 2022-04-01 15:39

Thank you so much!

Submitted by Nelie Cruz on Wed, 2022-06-15 01:08

I started my 72T and got my first distribution last April 14, 2022. But since then the value of my investments keep plunging because of so many factors that is going on around the world right now. Will i have a problem with the IRS if the value of my investments have decreased considerably since I started my 72T?I will wait for your reply. Thank you so much. 

Submitted by Alan - IRA critic on Wed, 2022-06-15 03:01

  • A large decrease in value of your IRA does not change your plan unless you set it up with the RMD method. The IRS only cares if you fail to take the exact distribution. A large reduction in value would substantially reduce your 2023 distribution if you used the RMD method. If you did not your distribution in future years would stay the same, and with the reduction in value it just means that your retirement savings will be worth less. To be clear, you will not have any problem with the IRS as long as you continue to take out your calculated distribution.
  • Perhaps the most serious problem for you is that continued high inflation might result in your distributions being insufficient to cover your living costs, but if you are forced to take out more than your calculated amount you would bust the plan and owe the penalty plus interest back to your first distribution. To prevent that from happening, you would have to cut back on your standard of living. Inflation was already bad in April, so hopefully you factored that in when projecting the annual distribution you needed from your plan.

Submitted by Nelie Cruz on Thu, 2022-06-16 02:29

Thank you so much as always!

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