72t Calc

Submitted by brcwm on Fri, 2024-01-05 18:31

Client elected to initiate a 72t distribution last year based on the RMD method. Client’s DOB is Jan 1966.

For the first calculation, CPA used the ending balance in 2022 of $913,171.13 and a life expectancy number from the IRS Table 1 which was 30.6 giving us an RMD in 2022 of $29,842.19. Is that right, client was 56 at the start of the year, but turned 57 in late-Jan 2023.

Based on a 2023 year-end value of 1,025,157, is the 72t RMD amount updated every year like a usual RMD? So, for 2024 it’s a 29.8 factor which equates to a $34,401 distribution for 2024.

Or, if it’s the age at the end of the year, which is 58 and a 28.9 factor. So, her RMD is $35,473. Correct?



Submitted by Alan - IRA critic on Fri, 2024-01-05 21:15

  • The age used for the 2023 distribution should have been 57 which is the age attained on client’s birthday in 2023, and that’s also true of actual RMDs. The divisor should have been 29.8, so the plan is invalid because it is too late to make up the shortfall.
  • Client may be able to “back into” a valid calculation for the amount actually distributed by using the fixed amortization method and lowering the interest rate used to the point where the rate used will generate the amount distributed in 2023. That same amount would then be distributed every year with no further calculations. Note that if that calculation is correct, then the risk of making an error every year with the RMD method is eliminated. To get to the amount that the 2023 1099R will show, the interest rate will probably have to be carried out to at least 4 decimal places. 
  • The RMD method is rarely used because it is inferior due to risk of large distribution swings from year to year, produces a lower calculation per dollar of account balance, and eliminates the option to make a one time switch to the RMD method later on. 

 



Submitted by brcwm on Fri, 2024-01-05 21:23

CPA wants to just move forward and use correct divisor this year, rather than fix last year. What could be the resulting issues with that?  If so, does that make the RMD in 2024 of $35,473?



Submitted by Alan - IRA critic on Fri, 2024-01-05 21:56

Since the 2023 distribution was incorrect, the plan was immediately busted if the IRS catches the discrepancy. The 2024 distribution would then be a new 72t plan using the fixed amortization method. Client would owe the penalty on the 2023 distributions. Refiguring the 2023 calculation to conform to the amount distributed and documenting that calculation as the one used for the plan would eliminate that 2023 penalty. 



Submitted by James Zumwalt on Mon, 2024-01-08 17:55

There is no interest rate that will produce a distribution of $29,842.19.  Even at an interest rate of 0.01%, a distribution of $30,690 would be required.



Submitted by Alan - IRA critic on Mon, 2024-01-08 20:16

Then it’s unlikely the plan can be salvaged. What was the date of the first distribution under the plan, and the date of the last distribution?



Submitted by James Zumwalt on Mon, 2024-01-08 23:00

Why don’t you take Alan’s suggestion of using the fixed amortization method?  If you take your first distribution in January 2024, you can use the 120% mid-term Applicable Federal Rate for December 2023 of 5.79%.  This would calculate to a distribution of $73,880.



Submitted by Ken Fitzgerald on Tue, 2024-01-09 05:23

As Alan pointed out, it looks like multiple mistakes were made by the CPA.   Client needs to know this, rather than CPA just insisting that they just continue, since the IRS penalties if discovered will be assessed to the client.  Best solution is for CPA to agree to pay the penalty for 2023 withdrawals, assuming that was the year they were taken (some of your year references don’t make sense, and an initial ending balance calc using yr end 2022 is what is used to compute 2023 withdrawals, along with age client will reach by end of 2023 for that table lookup). Client should either declare the 72T busted (and order no withdrawals in 2024) then start over in 2024 with someone who understands the basics of 72t calculations, or have CPA they used guarantee to pay all the penalties if this is ever discovered and all prior years of withdrawals are penalized. If client does not need the much larger withdrawal mentioned by one respondent using Amortization, they should figure out how much of the IRA shuld be split out to a second IRA used for the 72T, that supports the amount (using Amortization method) they want to take out each year, using correct gov’t interest rate figure that applies to be used in Amort calc for that month withdrawal starts, and leave the other IRA balance for emergency withdrawal if ever needed with 72t is running, where only that withdrawal has a 10% early penalty, and won’t bust the entire 72T.  Just my opinion. 



Submitted by James Zumwalt on Tue, 2024-01-09 14:39

CapeRetiree has made some excellent suggestions that the client should seriously consider.



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