72t IRA’s Setup
Appreciate any assist on setting up a 72t plan … tks
Given:
-I have 2 iras at Custodian A & Custodian B
-I want to setup a 72t early distribution before 59 1/2 using total balance of 2 iras to calculate distribtution
Questions:
1-If distributions come from ira A now, can they change & come from ira B later?
2-Can I change custodians for ira A or ira B after distributions begin?
3-Can I use any account balance between 12/11 – distribution date ?
4-Is Fed 120% mid rate to be used that of either 2 months before distribution date?
5-Can I take full year distribution at any time?
6-Rev.Rul.2002-62, p711, section e) item ii) any nontaxable transfer of a portion of account balance to another retirement plan …is listed as a modification of 72t plan ….what restrictions is meant by this?
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Permalink Submitted by Alan Spross on Thu, 2012-07-12 18:17
1) Yes, although doing that will probably generate questions from the IRS. You would probably need to file a 5329 every year either way to claim the 72t exception.
2) The IRS has busted a couple plans for partial transfers, sending inconsistent mixed signals on what they are thinking. Thousands of other partial transfers have not been challenged. I would not do this unless the benefits are considerable. Exposure could be reduced by transferring both accounts at the same time as that might be looked at by the IRS as a total rather than partial transfer. Note that the prior adverse rulings dealt with SEPP plans originally set up with only one account.
3) Yes, but the balance used must be a reasonable reflection of the current value. You should be OK if the date selected did not have a balance more than 15% above value when you initiate the plan. If you use a mid month date, be sure to make copies of an on line or other statement for the same date for both of your IRA accounts. Also, there can be no contributions or distributions from either account between the date of the account balance and the first 72t plan distribution.
4) Yes, use the highest rate for either of the two months prior to the month of your first distribution. Rate drops from 1.57 for July to 1.28 for August distributions.
5) Yes. The payment pattern does not matter. Only the exact annual amount (shown on 1099R) matters. For first year you have a choice to pro rate based on the month of first distribution or you can take out the full annual amount. That would allow you to start with monthly distributions now and decide in December if you want to take the full annual.
6) This is the problem with the two IRS busted plans for partial transfers. Conventional wisdom of SEPP experts believe that the original intent of “another retirement plan” meant a different type of plan, ie you could not transfer an IRA to 401k or vice versa. Note that the IRS Regs specifically allow Roth conversions within a plan so obviously they do not consider a Roth IRA to be “another retirement plan”.
Generally, the fewer moving parts there is to your plan, the better. Most IRS agents do not understand these plans very well, so the less scrutiny you attract, the better.
Permalink Submitted by R. White on Fri, 2012-07-13 18:06
Alan…many tks for your help…a couple of followups if you don’t mind.
Re: #2 above
– If changing custodians is an issue with 1 sepp could ….
2a. I setup 2 separate 72t plans for the 2 iras & would 2 forms 1099R be a problem?
2b. Can 2 sepps be setup in same year or does 1sepp have to wait till 2013?
2c. Would custodial changes to either ira w/ separate sepp then be viewed as a 100% balance transfer?
2d. Confused … I called the IRS & agent said they view all iras as one but do not enforce this?
Re: Life expectancy table
– I am single & iras have a beneficiary, can any of single, uniform or joint tables be used from IRS pub 590?
Permalink Submitted by Alan Spross on Fri, 2012-07-13 19:14
2a) You could have two separate plans. One benefit is that if you needed extra money, you could bust one plan and the other would not be affected. Two 1099Rs would not be a major problem, but simply having two plans increases the chance of the IRS inquiring. They do not see two simultaneous plans that often, but there is no question that you can do it. You just must keep everything totally separate, eg cannot transfer any funds between the two IRA accounts.
2b) The plans could be initiated in the same year or in different years.
2c) If you transfer all of one of the two IRAs to a totally new IRA, it should not be viewed as a partial transfer since the two plans are totally separate.
2d) They probably did not understand your question, and/or very few IRS agents understand SEPPs. All IRAs are considered as one for income tax purposes, but definitely not for SEPP purposes. On the other hand, if you have two IRA accounts in one SEPP, then they are viewed as one. If the two accounts comprise different SEPP plans, then they are considered separately with respect to SEPP compliance.
I would not use Pub 590 tables because they apply only for the RMD method and RMD produces a lower payout by about 40%. You also have to recalculate each year and you would forfeit the opportunity to make the one time switch to the RMD method to reduce your payout later on. The best approach is to use the amortization method with single life expectancy as this will generate the highest payout. Use the age that you will attain by the end of the year you start the plan. If the payout was more than you need, you would just partition the IRAs before starting the plan and use the other IRA for an emergency fund or to set up a later SEPP. The beneficiary on your IRA would be immaterial to your SEPP calculation in this situation.