Switching to RMD method in last year of 72t
Hello,
I am working with an FA who has a client who would like to switch from the amortization method to the RMD method. However, his last 72t payment is in November. Should we divide the calculated RMD by 12 which would have him falling short if he stops his payments in Nov or should he divide the RMD by 11 since he only has to continue for 11 more months?
Permalink Submitted by Alan Spross on Thu, 2011-01-06 00:20
For his final stub year he has up to 3 options providing he has taken out a minimum of 60 months of distributions since the plan began.
If he plans to simply continue monthly distributions, the new annual total under the RMD method should be divided by 11.
If you want a summary of his options (up to 3) for 2011, please advise DOB and month and year of his first 72t payment. Also if he distributed a pro rated amount or full annual amount in his first year.
Permalink Submitted by Imani York on Thu, 2011-01-06 18:06
Thanks, I would like to present all of the available options to the financial advisor. The client was born 12/18/1950. He began the SEPP in Nov of 2006. The year in which he began the SEPP payments, he received the prorated amount.
Permalink Submitted by Alan Spross on Thu, 2011-01-06 18:55
His modification date is 5 years from the date of his first payment in Nov, 2006.
If he took out 2/12 of his annual amount in 2006, then he must take out a minimum 10/12 of his annual amount in 2011 prior to the modification date.
He does NOT have the option to take nothing in 2011 because he only took out 2 months in 2006 and needs to total 60 months worth. Since he does NOT have the option to take nothing, the one time switch to the RMD method is the only way to reduce the payment, but be sure to double check the calculation since the change in payments may prompt IRS attention. He DOES have the option to change the joint vrs individual option from the one he used originally if he wishes, but I recommend using the single life expectancy table as that is less prone to error.
So his options are:
1) Take 10/12 of his annual amount in 2011 prior to the modification date. While the date of the distributions are not critical, since he is comfortable with monthly payments, he should continue them with the final payment in Oct, 2011.
2) Take his full annual amount in 2011 prior to the modification date. That distribution pattern is not critical, eg he could increase the monthly payment by 20% for each of the 10 months or just pick a date for a special distribution of 2 months worth in addition to the 10 equal installments. Unless he runs short of funds, no need to consider this option.
After the modification date in 2011, he can take as much or as little as he wishes, but better to wait until 2012 to simplify tax reporting. I assume he has been filing a 5329 to claim the SEPP exception code unless the custodian was showing Code 2. If the custodian changed to code 7 for distributions after 59.5, no need to change that code.
Permalink Submitted by Imani York on Thu, 2011-01-06 20:40
Thanks Alan. This was extremely helpful. Would you be able to tell me where I may find the explaination in some IRS publication in case I am asked to provide the source to the financial advisor?
Permalink Submitted by Alan Spross on Thu, 2011-01-06 23:48
Would like to, but the IRS has not published any comprehensive guidance on 72t plans since Notice 2002-62. Most of these concepts evolved from various IRS letter rulings, tax court decisions and an occasional related Notice. We are therefore left to piece together the facets that the IRS accepts and what they don’t accept. The best source for this information is the following link, dedicated solely to 72t plans. Such a site is necessary simply because the IRS has only issued basic guidelines and no publications that go beyond the 3 methods of calculation:
http://www.72t.net/72t/Introduction
Permalink Submitted by Imani York on Fri, 2011-01-07 15:10
Alan, thank you so much for your help on this.