72t with Multiple IRA’s
I have a client that was planning to put funds into an annuity to produce income under a 72t. It was determined to be more advantageous to elect the 10% free withdrawals from the annuity instead of activating the income rider. The challenge is that the 10% free withdrawal is not available until year 2 and the client needs the income now. I thought a simple solution would be to transfer the majority of the account balance into the 72t IRA (#1) keeping in IRA #2 only the amount needed to provide income for the first year until the free withdrawals from IRA #1 become available in year 2. The question is, is there a way to avoid the 10% penalty on the IRA #2 while still removing all the funds from this IRA during the course of 1 year? Thanks a million for the help!
Permalink Submitted by Alan - IRA critic on Mon, 2014-02-03 23:45
Generally, a 72t plan will only produce annual distributions of somewhat less than 5% of the account(s) balance per year. and it’s best to avoid partial transfers between IRA accounts during the plan. Therefore, the two IRA accounts need to be properly set up before starting the plan. For example, if client has a total balance of 1mm, he could partition the accounts into an annuity IRA for 900k and a non annuity IRA for 100k before starting the plan. Both account balances would be used to calculate the annual distribution which would come in around 46,000. In year one the 46k could be taken from the non annuity IRA, and after that the annuity IRA could become the source of the 46k. It’s even possible to take the 46k in any proportion between the two accounts as long as the annual gross distribution is exactly 46k or whatever the calculation generates. If he didn’t need 46k annually, before starting the plan he should partition off into a 3rd IRA the appropriate amount. The 3rd IRA account would NOT be part of the plan but could be tapped for emergency penalty distributions if necessary. If 46k will not be enough, he needs to have a balance of more than 1mm in the IRAs that are part of the plan. Again, it is better to avoid any transfers between IRA accounts that are part of the plan once the first distribution has been taken as the IRS has busted plans before for partial transfers. A full transfer is OK. I don’t know if these options will fit together for client or not.
Permalink Submitted by Stephen Rhodes on Tue, 2014-02-04 17:09
Thanks so much for the quick response. This answers my question exactly. One last question, do you recommond any 72t calculators?
Permalink Submitted by mk foss on Tue, 2014-02-04 18:10
Try 72t.net There is a calculator there that allows you to “back into” the size of the fund needed for the distribution you want.