72t – one time change to RMD
We have a situation in that we have a client who started 72-t withdrawals in August 1998, they will turn 59.5 in October 2009. Due to the downturn in the markets last year, their withdrawals were putting enormous pressure on the account. We wanted to reduce her withdrawals starting in October 2008. Assuming we used the one-time change to RMD method, which account balance should we have used – 12/31/07 or 9/30/2008, or does it matter. Could we have used August 2008 since she originally started the withdrawals in that month?
Can you do a mid-calendar-year change? What about 2009? Does she take withdrawals until October, based on 12.31.08 values?
Permalink Submitted by Alan Spross on Thu, 2009-02-05 19:11
There are no clear answers to issues regarding a mid year switch to RMD. It is generally best to avoid it since the RMD method is inherently a calendar year calculation, and a client may well have to explain what they did to the IRS.
There are no rulings to my knowledge that a client cannot use a mid term value like the 9/30 statement, and this is an area in which the IRS will probably be somewhat sympathetic following the market meltdown. Considering all variables in play here, it probably does NOT matter which date you use here. Bottom line is that $x have now been distributed in CY 2008, and you will need to have some rationale for the total. Client could have made the change effective 1/1/2008, but probably had already taken out too much through September to comply with a 1/1/2008 switch. The only variables left that are flexible will be the account balance used and the joint vrs individual age factors.
2009 is the final stub year. As such there are several options available because the 5 year period has long since passed:
1) Take out nothing
2) Pro rate the RMD distribution @ 75% (Jan-Sept)
3) Take out full 100% of RMD distribution
# 2 probably carries the least risk. Use 12/31/08 value and age attained in 2009; same joint vrs individual assumption used for the 2008 switch.