72t

Submitted by Thomas Ferry on Fri, 2014-05-09 17:25

In addition to providing assistance with answers to questions below, is their reading material that you might suggest on the details of 72t?

-Do pro rata or aggregate rules apply to all SEP IRAs of a taxpayer when exercising 72t on one of the SEP IRAs, or can the taxpayer apply 72t to just one of many SEPP IRAs?

-if the taxpayer can apply 72t to just one of many SEPP IRAs, is their a deadline by which the one large SEP has to be broken out into several SEPs BEFORE incepting 72t on one of the newly formed SEP IRAs?

-while taking 72t, can taxpayer make contributions to a SEP that is not subject to 72t?

-if taxpayer begins 72t in May 2014, is the maximum interest rate of 120% of the Federal midterm rate an AVERAGE of 120% of the Federal midterm rate for March and April?

-are their any methods other than RMD, Fixed Amortization or Fixed Annuitization, and if so, do they result in stable payments?

-if taxpayer begins with a method other than RMD, is their a deadline for exercising the one time switch to RMD? Does the switch have to be made during a certain time of year?

-when switching to RMD (after incepting 72t under a different method), what date is used to calculate the RMD, and by when does the new amount calculated have to be paid?

-when taking 72t under the RMD method, how is the new yearly amount calculated from one year to the next?

Thank you



Submitted by Alan - IRA critic on Fri, 2014-05-09 18:31

  1. Taxpayer can set up the SEPP using one IRA and leave other IRAs out of the plan. Reference to pro rata rules I assume is regarding basis on Form 8606 from non deductible IRA contributions. If taxpayer has basis it applies to distributions from any of the IRAs they have, and the SEPP distributions would be partially tax free as a result. When setting up the SEPP when the total IRA value is greater than needed, the best plan is to transfer the optimal value into one IRA account and use that one for the SEPP and keep the others for emergency needs or even for a second SEPP started later on.
  2. When doing the  pre SEPP transfers above, they need to be completed before the first distribution. The SEPP is then calculated using the account value after the transfer, but there is no specific time limit.
  3. I guess you are asking about SEP IRAs as well as SEPP plans. A SEP IRA can be left totally out of the plan, and new contributions can be made to any IRA accounts that are not part of the plan, but NOT to any accounts that are included in the plan, even if they are only included for account value calculation purposes, but no distributions are being taken out.
  4. The max interest rate is the highest of the two months prior to the month of the first distribution. There is no averaging. Taxpayer can use a lower interest rate, but it is recommended to use the highest rate and thereby set up the SEPP account with a lower value than would be needed if a lower interest rate was used.
  5. The IRS recognizes recalculated plans for amortization and annuitization, but the only two options for a fixed dollar distribution are the basic amortization and annuitization methods. Amortization produces the highest payment.
  6. THe one time switch to the RMD method is best made effective on Jan 1st using the 12/31 account value. The IRS will not automatically disallow a mid year change, but I would avoid it as there are too many variables with 1099Rs etc. If at some point in the year taxpayer has taken out an amount that does NOT exceed the fixed dollar calculation, they could retroactively change to RMD back to 1/1 by simply not exceeding the indicated RMD calculation in total for the year.
  7. The distribution pattern does not matter, only that the total annual distribution per the 1099R is the correct amount. If the switch is done as recommended above taxpayer would get a 1099R showing the fixed dollar calculation for the last year of that method, and the next year the 1099R will total to the RMD method calculation. Note that RMD requires a calculation at the same time every year and more calculations means more risk of an error. But distributions can be taken anytime during the year.
  8. If the IRA value has remained somewhat constant, you could expect the one time switch to reduce the distribution around 40%. It is OK to change from a single life calculation with the fixed dollar to a joint life with the RMD method if you want to make the RMD distribution amount lower than it would have been using the single life table for the RMD calculation.
  9. Link here for best internet site dedicated solely to 72t plans:    http://www.72t.net/Home

Submitted by Thomas Ferry on Fri, 2014-05-09 19:51

Thank you

Submitted by Thomas Ferry on Fri, 2014-05-09 20:10

I’ve read through the link you provided.  My calculator, provided by Pershing LLC, (while using the single life Amortization method) uses 2.19% for monthly distributions and 2.21% for annual.  Does it seem correct that monthly rate is different than annaul?The monthly calc is $7825 even, no cents (I’m concerned b/c the link said no to round) and annualizes to $93,900.   The annualized calc is $95,098 (again even, no cents).Being that it’s May, the client would rather take monthly to reduce reportable income in ’14.  Will the annualized difference of $1198 result in IRS claiming taxpayer broke the SEPP?

Submitted by Alan - IRA critic on Fri, 2014-05-09 21:41

I doubt there will be a problem, because no taxpayers are reporting IRS problems due to this calculator variation. The sponsor of the 72t site does not believe that the distribution pattern matters and there is only one rate indicated on the site calculator (2.21% for May start, 2.31 for June start). So I would use the 72t site calculator to determine the annual SEPP distribution and then distribute it any way you like during the calendar year. Fidelity is the other firm that indicates rate variation depending on the distribution pattern. This is driven by the projected return being more when distributions are taken later rather than earlier in the year. The strange thing is that these sites indicating different rates never require the taxpayer to stay rigidly with the indicated distribution pattern. The 72t site also recommends taking the exact calculated amount to the penny, not rounding off to the nearest dollar. Most critical is taking the exact same amount each year unless the RMD method is being used. Interest rates are not a factor in the RMD method.

Submitted by Thomas Ferry on Mon, 2014-05-12 14:36

Thank youMy broker dealer allows me to calculate a monthly distribution.  Can I assume for example that would permit a 55 yr old client to begin monthly equal periodic distributions June ’14, take them for 60 months, concluding May ’19, while spreading them over 6 separate calendar years? So from an annualized calculation, less would be distributed in ’14 and ’19 than in ’15, ’16, ’17, and ’18?

Submitted by Thomas Ferry on Thu, 2014-07-24 14:34

HiYou wrote that the answer to my question above is that it’s okay to spread 60 monthlu equal distributions over 6 calendar years, yet I read the following on the 72t.net site under “First Modification Date” “For purposes of the 5-Year rule, the clock starts on the date the first distribution occurs. Also note that for purposes of the 5-Year rule you must take one annual distribution in each of the 1st 5 years for a total of 5 annual distributions. “Am I misundrstanding this?Thanks    

Submitted by Alan - IRA critic on Thu, 2014-07-24 19:28

  1. That website statement is not entirely clear. Earlier it states that the clock starts on the date of the first distribution, so all SEPP plans will include parts of 6 different calendar years. The 5 annual distributions refers to the annual periods, not to calendar years, but SEPPs are basically calendar year plans and 1099R forms report on calendar year distributions. The moderator of the site has interpreted the Arnold vs Commissioner case as requiring less flexibility for 5 year plans than for plans that end at 59.5. I have read that case several times and do not see anything in it that states more than than a taxpayer cannot modify a SEPP plan before the modification date which is always 5 years after the date of the first distribution. Arnold took a distribution that was NOT a SEPP distribution before the modification date so clearly busted his plan. But a taxpayer should have the same options in a 5 year plan than any other plan as long as 60 months worth of payments are taken. Like other plans the taxpayer should in the first year be able to take out either a pro rated amount or the full annual amount. In the full calendar years of the plan taxpayer must obviously take out the full annual amount. In the final year (the 6th calendar year) of the plan, if the taxpayer took out less than 12 months worth in the first year, they must take out enought to bring the total to 60 months as a minimum. But I think the taxpayer could also take out the full annual amount in the 6th year before the mod date and if he also took out the full annual in the first year, he would end up with 72 months of distributions. Or he could take out nothing because he has already taken out the 60 months worth. In other words, taxpayer should have all the flexibility of a plan ending at 59.5 with respect to the first year options and the final year options as long as 60 months worth have been distributed.
  2. Subject to the above that leaves the first CY options as 1) Pro rated amount by the month or 2) Full annual amount
  3. Subject to the above that leaves the final CY options as 1) Pro rated by the month  2) Full annual amount or 3) Take nothing as long as 60 months worth in total has been taken out.
  4. Using any of the above options, I have never heard of any cases where the IRS busted the plan

 

Submitted by Alan - IRA critic on Mon, 2014-05-12 18:35

Yes, that would be fine. Be sure you do not take less than 60 monthly distributions. Also, if setting up automatic distributions, use a date in the first half of the month, so you will have a chance to make any December corrections before the year ends. And if your first distribution is in June, you can use the higher May interest rate of 2.31%, or slightly less if Pershing wants you to reflect the monthly distributions in the rate, even though this is not necessary. Since you can always use a lower rate there is no risk of dropping a little below the 2.31%..

Submitted by Thomas Ferry on Tue, 2014-05-13 13:24

Can I assume that the annual management fee that the broker dealer draws from the account is excluded and separate from the amount that the taxpayer is required to withdraw under 72t? 

Submitted by Alan - IRA critic on Tue, 2014-05-13 17:10

Yes, it is separate and not a reportable distribution. It is not included on the 1099R. But if you want to preserve your IRA account and particularly if you itemize, you could have the broker bill you and pay it from your non IRA funds. The fee is subject to the 2% of AGI floor before you can deduct it as a misc itemized deduction when paid from outside funds.

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