72t when custodian will not code

Submitted by Toby Hartley on Tue, 2014-03-04 18:12

Have a 54 yr who wants to take 99K of Q funds and annuitize it, creating around 10,500 a year for the next 10 years. I know already that the 10 year annuitization does not qualify the payments for any exception. She has a total of around 275K in this IRA currently. So, based on that a 72t would produce right around the 10,500 a year. Question is, if she leaves 176K in the current account, moves 99K into a new SPIA for 10 yr PC and has the calculations from 72t showing 10,500 as acceptable payments, will that fly? The SPIA company of course will not code box 7 as an exception so does she have to use that 5329 for that? Plus, does this even fly under that arrangement I disrobed above?



Submitted by Alan - IRA critic on Tue, 2014-03-04 19:11

  • If the 10,500 was calculated using all or most of the 275k IRA balance to calculate the annual distribution using one of the 3 approved methods, the plan should be valid but the entire balance used for the calculation would be considered part of the SEPP plan (see warning in final point). That means that the IRA annuity paying out the 10,500 as well the the remaining 176k in a non annuity IRA are both part of the plan and neither account can receive any contribution or make a distribution until the SEPP plan term is completed. After completion, the remaining payout will continue for another 5 years or so, but it will not be required under the plan, and will be coded 7 for payments after age 59.5. Meanwhile, client will need to file the 5329 and enter exception code 02 on the line because the annuity co will use Code 1 on the 1099R and this will have to be overidden.
  • Client will need to use a reverse 72t calculator to determine exactly what IRA balance will generate exactly 10,500 annually. Then the existing IRA can be partitioned into 2 new accounts. First the 99k to the annuity co for an SPIA IRA annuity, second the difference between the reverse calculated amount and the 99 will go into a new IRA that will be part of the SEPP plan and cannot be touched until after the plan terminates. The remaining amount left in the original IRA will NOT be part of the SEPP plan and can receive contributions, issue distributions subject to penalty for emergency needs, etc.
  • Warning!! This plan has several moving parts and that creates increased risk of an error in execution, or of confusing the IRS because the IRS is not used to seeing 72t plans structured this way. That could generate a request for client’s calculations so these calculations should be carefully documented and triple checked before pulling the trigger on this. All IRA partitioning to the correct values should be completed before ordering any SEPP distribution. As indicated, this approach appears to be valid but I would not recommend it due to IRS inconsistency and unfamiliarity with this approach.


Submitted by Toby Hartley on Tue, 2014-03-04 19:24

Thanks, and understood.  All of that makes sense and I agree, if I can find another way to place it all in a SEPP plan where the payments will only have to go for the period required then we will.  I will instruct the advisor and the client and let them decide.  Obvioulsy to consult with their tax advisor as well. 



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