72t Distribution Calculation under IRS Notice 2022-6
I have a client who was originally going to perform a 72t distribution starting in April of this year. Due to some unexpected income he decided to delay until December of this year or perhaps January of next year. However, his balance has obviously continued to drop and thus the amount of income he may have expected to generate has also dropped. This brings up a few questions:
1. It is now my understanding, under IRS Notice 2022-6, that he can use up to 5% interest in determining which option to choose from, which will obviously increase the payment amounts (we were using the normal 120% back in March when we first looked into this) for him. Has there been any indication that this is a permanent increase? My worry is if we wait, this goes away and he would be stuck with a lower payment.
2. If we elect to do this sooner than later in order to make sure we can use the 5% option, I also understand that we can use any balance since 12/31 of last year in making this calculation under the same IRS notice. Is my understanding correct?
3. Does it matter which option we use for the 72t calculation in order to use the 5% option and the higher historical balance? He originally rolled over $1.5 million into the IRA in March, but the balance is now down to $1.376 million. The larger amount would obviously give him more income, but I want to make sure we can use that 5% rate with any of the methods. However, he would need to start income this year in order to use that value, correct? If we wait until January of 2023, we would need to use that balance for the calculation, correct? Thus, any additional market drops could further reduce his income calculation. If we were to take income in 2022 in order to use the higher valuation, does he have to take the full annual amount in 2022 or can he just start and take a payment in December for 1/12 of the annual amount calculated?
With his current balance and his age (54), I am coming up with $42,359 under the RMD method and $86,563 under the amortization method. I did not calculate the Annuitization method.
Thank you.
Permalink Submitted by Alan - IRA critic on Mon, 2022-07-25 20:01
Permalink Submitted by [email protected] on Mon, 2022-07-25 20:45
Thank you!! I read the following on IRS notice 2022-06 regarding the balance, which is why I was wondering if we could use the 12/31/21 balance. He had about $1.9 million total at the end of 12/31, but when he rolled over the funds we split it into two IRA’s, one specifically for the 72t, but without knowing at that time about the 5% rule. Anyway, here is what the IRS notice said: (d) Account balance. For purposes of applying the required minimum distribution method, the account balance for a distribution year is determined under § 1.401(a)(9)-5. 8 For the fixed amortization and fixed annuitization methods, the account balance must be determined in a reasonable manner based on the facts and circumstances. The account balance will be treated as determined in a reasonable manner if it is the account balance on any date within the period that begins on December 31 of the year prior to the date of the first distribution and ends on the date of the first distribution. Thanks as always!
Permalink Submitted by Alan - IRA critic on Tue, 2022-07-26 00:00