Stumped with 72t advice!
I am a CPA/Financial Advisor, and also a subscriber to your newsletter. I have also attended one of your weekend training sessions. I have a dilemna I hope you can help me with. I have a new client that stopped in to see me for some advice on 72(t) distributions. I used Natalie Choate’s “Life and Death Planning for Retirement Benefits”, 6th edtion 2006 to answer most of his questions. He is still not convinced regarding my answer to one of his questions in particular, though. I told him that in order to calculate the proper distribution, he had to AGGREGATE (add up) all of his IRA account balances (he has two IRA’s), then pick a method (RMD, Amortization or Annuity). He is not convinced that he has to aggregate (add up) ALL his IRA accounts for this purpose. He has been researching the tax Code and is finding verbage that makes it sound like he does not have to aggregate both accounts, but can use only ONE for the purpose of 72t, and eliminate the other. Can he really eliminate one of his accounts, and use the other? Or did I tell him correctly that he has to add up the balances in ALL his IRA accounts for purposes of 72t? Thanks!!!
Permalink Submitted by Alan Spross on Mon, 2010-11-15 20:49
Mike,
Since most of the tax rules regarding IRAs do require aggregation of all the accounts, this does NOT apply to SEPP plans. The client can use one, more than one or all accounts in determining the initial account balance. But once the accounts to be part of the plan are identified, he can then aggregate them in order to determine which of the accounts distributes the annual SEPP distribution.
Moreover, for clients that do not need every last dollar of their IRAs to generate SEPP income, it is recommended to partition the IRA balances so that the account that will be used holds the amount needed to fund the distributions, and the rest of the IRA balance is kept out of the plan for future emergency use. These other IRA accounts could also be used to fund a later SEPP plan if necessary. While any distributions from the non SEPP account would be normally be penalized, there are other possible penalty waivers that could be applied to those distributions, eg high medical costs, higher education etc.
In summary, the client is correct. However, I doubt that he found any of this in the tax code, because most 72t rules have been developed by various IRS letter rulings. The basic rules are on RR 2002-62, but that ruling was not specific on this subject.
Note: The client should use the amortization method and single life expectancy table and be careful to select the correct 120% mid term rate. This will yield the highest distribution per dollar of IRA balance. By getting the higher dollar per balance, there would be more left to partition out to a non SEPP account for future emergency use. The partitioning should be done by direct transfer because the client should save his one allowed indirect rollover per account to use to correct distribution errors, ie in case too much is distributed in error. Could then roll the excess back within 60 days.