72t distributions from multiple accounts
Are you able to add multiple IRA accounts (with multiple trustees), and take a 72t distribution from only one of the accounts? I have a 50 year old client who will rollover $662,000 from his pension into an IRA brokerage account. I would like to do the 72t calculation on the entire $662,000 (which comes to approx $2,700/mo) and then transfer $500,000 to two different variable annuity companies, leaving $162,000 in the brokerage account. Once the 162,000 is depleted in (approx) 5 years, I would then continue the distributions from the two remaining carriers.
My objective is to:
1) take 5 years of distributions from a fixed account, and invest the remaining 500k into VA’s with living benefits guarantees, instead of immediately taking distributions on the entire $662k in a VA.
2) Invest with 2 carriers to diversify my client’s holdings. (Also – the living benefits riders are somewhat different).
I have gotten different two different answers to this question. A “Yes” and a “No”.
Permalink Submitted by Alan Spross on Wed, 2010-07-21 19:47
You are able to do this, but beware of the added complexity due to the additional moving parts to the plan. All 3 accounts would be set up first BEFORE starting the 72t plan, and then all 3 accounts would comprise what is referred to as the “72t universe”. The initial account balance is the total of the account balances documented by statements for each account as of the SAME DAY. You then will have one 72t plan spread over 3 accounts, and the annual total distribution can come in any combination over the 3 accounts. 1099R forms will not be coded for the 72t exception, therefore Form 5329 will have to be filed with each tax return showing exception code “02” applying to the distribution. By doing the transfers first, you eliminate the risk posed by a couple IRS rulings regarding partial transfers in a 72t plan. These should also be done by direct transfer to save the one rollover permitted for use as a safety valve to correct a mistaken distribution that pushes the annual total over the correct amount.
Once the brokerage account is drained, the distributions will switch over to the annuities, but the annuities can also issue distributions before the brokerage is drained if you wish. For the year additional accounts begin to distribute, there will be two 1099R forms and the total on those forms must be the exact annual amount calculated for the plan.
Permalink Submitted by David Niles on Wed, 2010-07-21 23:07
Thank you so much. I have one other question. I was looking into a 5 year certain annuity as an alternative to investing the 162k into the brogerage account (as my fixed bucket to draw from over the next 5 years). I was told I cannot invest the 162k in a 5 year certain annuity under rule 72t. Are you aware of this, and if so, is that right? Thanks again.
Permalink Submitted by Alan Spross on Wed, 2010-07-21 23:36
If the 5 year period certain annuity was held in a custodial account under which the payments go INTO the IRA rather than distributed to the owner, this would work. Client could then take the 32,400 out of the IRA as needed. There probably would be a small amount left over in the IRA. With 3 IRAs in various annuity products, this plan would have to be carefully crafted and monitored to be sure that only 32,400 is distributed each year, assuming that amount is correct.
Of course, most important is whether the 32,400 annual distribution will be enough to sustain the client annually for 9 years, not knowing what the inflation rate might turn out to be. The 120% mid term rates are now dropping as are the markets, and client cannot use an initial balance date prior to when all 3 accounts are established. If the first payout is distributed in August, then the higher June interest rate can be utilized. The July rate dropped further and that would depress the calculation for any Sept startup and probably October through year end the way the interest rates are trending.
Permalink Submitted by David Niles on Thu, 2010-07-22 00:15
Yes, I am hoping to use the June 120% mid term rate since we will receive the money on August 1st, and plan to distribute money before August ends.
I don’t know if I understand you (or if I didn’t make myself clear) regarding the 5 year period certain annuity. I did plan/hope to take the $2,725/mo from the 5 year certain annuity and leave the remaining 500k in the VA for 5 years before we take any distributions from them. This means we would distribute the money TO the owner FROM the QUALIFIED (IRA) 5 year period certain annuity. From your previous reply, it soinds like I may not be able to do this. Here’s my plan:
1) Set up 3 IRA accounts (BEFORE) applying rule 72t (as per your instructions).
2) 159K into a qualified SPIA (5 year certain) – which pays 2,725/mo for 5 years and is then depleted. I mentioned 162k, but I got a quote that we need a 159k premium for the 2,725/mo – 5 year payout. The 2,725 is the amount calculated under the annuity method for a 660k IRA balance for my 50 year old client, using the June 2010 AFR mid term (monthly) rate.
2) Invest remaining money into VA’s and distribute the 2,725 from both of them in 5 years.
I don’t know if the 5 year period certain annuity is in conflict with the “annuity medthod” 72t calculation . This is why I may have been told I cannot do this (by a VA Advanced Market Rep). It would be a lot easier to invest the total amount in the VA and start taking distributions, but I am attempting to take distributions from a fixed bucket initially.
Permalink Submitted by Alan Spross on Thu, 2010-07-22 00:40
Essentially you plan to do a reverse calculation to determine the amount in the brokerage or 5 year period certain annuity that will produce an annual distribution that exactly equals the 72t calculation. That is OK if you do it correctly, but the amount needs to be exact subject to .50 rounding. Once you get the exact amount, then the remaining balance can go to the other two IRA annuity accounts.
You get a few dollars more if you use amortization rather than the annuitization method. But if something goes wrong and the period certain distribution falls short, then the rest will have to come from one of the other two IRAs. If it goes over, a 60 day rollback (only one permitted per year per account) to one of the IRAs would reduce the annual distribution to the correct amount.
But there are alot of moving parts, and usually the insurance companies are not going to do much to support a 72t plan, so all the checking and due diligence will have to come from you and the client.
Permalink Submitted by David Niles on Thu, 2010-07-22 00:59
Thank you!