72T Question
I just had a client receive a rollover. He is 55. He want to use the highest possible dollar amount and we calculated that to be around $80,000 a year. This number was based on using December interest rates. My question is, when a client wants to use this amount and lock it in, when does he have to begin taking his payments?? Can he wait until June let’s say and start taking his 72T payments?? Also, if he is allowed to wait until June to get that same dollar amount, does he have to take the full $80,000 by the end of the year or just half that amount?
Thank you.
Jeff
Permalink Submitted by Alan Spross on Mon, 2008-02-25 20:34
Jeff,
I think you mean he wants the full account balance to generate the largest possible 72t annual distribution. The interest rate that is used is 120% of the federal mid term rate for either of the prior two months and this rate took a big drop for March. Therefore, in order to get the benefit of the much higher February rate, he must start his plan and receive the first payment prior to the end of April.
Because this is his first year, known as a “stub year”, he has the choice of either taking 75% of the annual calculation (9 months), or the full annual calculation. If he starts two months sooner than he wants, then he would probably opt for the 75% figure.
The deadline for the first payment in order to use the even higher rate for December is therefore this Friday, 2/29. This might be impossible to pull off in that time frame, but it may be worth it to try and if the check does not arrive till March, he would have to use the lower January rate, and adjust the remaining payments accordingly to arrive at the exact amount required by the end of the year.
As indicated, he CANNOT use the December rate and defer the start of the plan until June. To use that rate he has until Friday.
With respect to the account balance used, there is also some flexibility there that is applied differently. If he has just completed the rollover, he could use the opening balance, or any other daily ending balance prior to ordering the first payment. The higher the balance the higher the annual calculation. But be sure that ALL funds have been received for the rollover and that there is no trailing dividends or other adjustments, because if they arrive after the plan is started, it busts the plan because a contribution has been added to the account. Make sure that everyone involved understand this is a 72t and NO contributions are to be made to the account. An employer would automatically forward any trailing dividends to the same IRA, so one way to insure against this is to have the IRA custodian create a second IRA and transfer the current funds to that. By doing this, if the employer plan distributes and additional funds they will be contribution harmlessly into the first IRA, which will not be a 72t account.