72T

Submitted by Mobey on Thu, 2015-05-14 19:13

Hello,

Help me remember how this works.

1. If I wanted to start one today, can I pay out a lump sum for the months of Jan-April so I effectively start my 5 years on 1/1/15?

2. Assuming 1 is correct, then I’d assume my five years are up 1/1/2020, correct?

3. If not, are my five years up in May of 2020 or do I need to wait and include the entire year?

4. Calculation options?

Thanks



Submitted by Alan - IRA critic on Thu, 2015-05-14 19:41

  • Your 5 years starts on the date of your first distribution and would therefore be completed 5 years from that date. You must also distribute no less than 60 months worth of distributions during this time.
  • You have the option of either pro rating or taking a full annual distribution in 2015. If you take a full annual distribution, then you will not have to take a distribution in 2020 prior to 5/20. You cannot take a distribution that is not a 72t allowed distribution prior to 5/20/20.
  • Your plan must last until age 59.5 if that happens to be longer than 5 years from the date of your first distribution.
  • There are 3 calculation options. The one generating the largest distribution per dollar of account balance is the amortization method. You are also allowed on one time switch to the RMD method if you want to reduce your distribution. Your annual distribution can also be recalculated annually, but I do not recommend that since the IRS sees very few recalculated plans and would probably have inquiries about it.

Submitted by Mobey on Thu, 2015-05-14 20:01

Thanks!One clarification. You said both that 1 – must take at least 5 years worth of distributions and 2 – if I took a full year this year I could skip the 1/1/2020-5/20/2020. Makes sense. But then you said I can’t take a non-72T distribution between 1/1/2020 and 5/20/2020. If I take a full year in 2015 by taking one lump for Jan-April and monthly thereafter, can’t I continue the monthly through May 2020.

Submitted by Alan - IRA critic on Thu, 2015-05-14 20:56

  • You just asked a question on which those knowledgeable on 72t plans disagree. Some think the IRS has indicated that in a 5 year plan no more than 60 months worth of distributions can be taken out, so in their way of thinking you could not take out anything in early 2020 if you have already withdrawn 60 months worth by 12/31/2019. The other camp does not think the IRS indicated this restriction. In a plan running more than 5 years, in the last year you have 3 options (full annual, pro rated annual or nothing). The second camp feels that these same options exist for either a 5 year or an age 59.5 plan as long as you have taken out at least 60 months worth and therefore the monthly payments can continue in 2020 which would give you a pro rated amount in 2020 in addition to the 60 months earlier. I am in the latter camp, as I have never heard of the IRS busting a plan for pro rating the final year.
  • Note that you can use any distribution plan you like during a calendar year, and the pattern can be changed from year to year. For example, you could take an annual lump sum in a year, quarterly payments the next year, monthly payments the next year or random payments. The only critical factor is the annual total distribution shown on the 1099R. That means for the first year you could start with monthly payments in May, and then in December decide whether you want to add a lump sum to bring the total up to the full annual or just stick with 8 months worth. That keeps your options open longer.

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