72t
Its been a while since I have done a 72t calculation, and I just wanted to make sure that I didn’t miss anything.
Paul born 8/21/55 Has $720,000 that he will receive in a lump sum distribution from his employer. He would like to do a 72t from age 57.3-62.3. He needs about $2,000 a month until 63.5 where he will have the remainder in an IRA.
Anything I am missing on this?
Permalink Submitted by Alan Spross on Tue, 2012-04-17 19:01
You are correct that the 72t plan must not be modified until 5 years has passed from the date of the first distribution for those who will reach 59.5 before the 5 year period is completed.
However, it is not clear whether Paul plans to take the 72t distributions from the employer plan or from a rollover IRA. If the 72t plan is needed, the best approach is to do a direct rollover from the plan to a rollover IRA, determine what IRA balance is needed to generate 24k per year using the amortization plan, and then transfer that amount to a second IRA and start the plan. The original rollover IRA can be used for emergency needs to prevent the 72t plan from being broken if he needs more money. Employer plans do not provide 72t support and may not offer flexible distributions. They also will not allow funds to be rolled back in the event too much is taken out due to administrative error.
Note that if Paul separated from service from the employer sponsoring the qualified plan in the year he would reach 55 or later, distributions taken directly from the plan are not subject to penalty, and a 72t plan could be avoided. But for that to be practical the plan must allow flexible distributions until the 5 year period ends. If the plan required a lump sum distribution, even though the penalty would not apply, a distribution of 120,000 in a single year would inflate his marginal tax rate and that might well cost more than the 10% penalty. If a lump sum is required, then a direct rollover to an IRA should be done before starting a 72t plan.