amount taken under sect 72 t has changed, any problem ?
I have a prospect that I just met who was 50 years old at the time she said she started a sect 72t for around $1000.00 per month.
Cause of her age I assume she would have to continue to take the same amount of money per year till she reaches 59.
She says around 2 or 3 years ago her advisor said that there is something new in the law which gave her the ability to reduce her yearly distribution from the sect 72t to around $250.00 per month from the $1000.00 she had been taking already for a few years.
Why does this not violate the rule requiring the same amount of money per year coming from the 72t account for the required time period?
I understand you may be able to reduce the internal rate of return a bit which may reduce the payout a little but a reduction of over $800.00 per month.
What am I missing
Permalink Submitted by Alan Spross on Sun, 2008-03-09 20:46
The advisor is likely referring to the one time switch of method to the RMD method from either the fixed amortization or fixed annuitization methods. This usually results in a considerable reduction in the SEPP amount, but you would not get anywhere near an 75% reduction unless the account balance had also dropped a considerable amount.
She does have to continue the plan until 59.5. But using the RMD method and the 12/31/07 account value, you can determine what the 2008 distribution would be. It is best to make this change on a calendar year basis rather than mid year.
This change was introduced by RR 2002-62 a little over 5 years ago. This is a copy of the appropriate paragraph:
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(b) One-time change to required minimum distribution method. An individual who begins distributions in a year using either the fixed amortization method or the fixed annuitization method may in any subsequent year switch to the required minimum distribution method to determine the payment for the year of the switch and all subsequent years and the change in method will not be treated as a modification within the meaning of 72(t)(4). Once a change is made under this paragraph, the required minimum distribution method must be followed in all subsequent years. Any subsequent change will be a modification for purposes of 72(t)(4).
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