higher 72t withdrawl rate
Is there any way to withdraw a higher percentage than the “120% of the federal mid term rate”, and not be taxed the 10% penalty? I have a 48 yr old that wants to invest in a mortgage. The mortgage would be held in her IRA and would have an interest rate of 8%. The client would like to take the 8% as a withdrawl each year.
Permalink Submitted by Alan Spross on Fri, 2012-07-13 17:32
No, a 72t plan can use a max interest rate of 120% fed mid term regardless of whether investments in the IRA produce large gains.
A 72t plan that must last 11 years will usually fail in some manner. Typically, something will occur over that long a time frame that makes the payout inadequate. If the plan is busted for any reason late in the term, all the prior distributions will be penalized and interest will also count up over that long a period. However, if there is some sort of funding to fall back on, such as returning to work, working more, receiving an inheritance or has taxable investments that can fill the gap, then the risk of busting the 72t are much reduced.
Note that the IRS has approved “recalculated plans”. While that increases the potential scrutiny from the IRS and the annual recalc makes for more changes of error, since the recalc must be done annually, any future increase in the current record low interest rates will increase the payout. Increased balance from the yield will also increase the payout since the plan will only produce around 5% of the balance and the gain in the IRA will be 8%. Also, the increased age adds to the payout. So this is something to consider after considering all the details of recalculation. The taxpayer must keep detailed records for each recalc in order to be ready for an IRS inquiry.