IRA 72t starting value

Submitted by chris erickson on Fri, 2015-11-20 19:34

Hi,

Someone I know is planning to roll a $2.5M 401(k) into an IRA in 2016. Then they will transfer $1M from $2.5M IRA into another IRA, from which they will take 72t distributions.. They will turn 57 in 2016, and they plan to take 72t distributions from one of the IRAs, using the RMD method single-life table (divisor would be 27.9 in 2016 at age 57). Question: because these IRAs did not exist on 12/31/15 there is no IRA balance to put in the numerator with which to compute the distribution. What value would be used in this case? Would it be the account’s initial opening balance ($1M) which divided by 27.9 = $35,842.29 for 2016?

Thanks!



Submitted by Alan - IRA critic on Sat, 2015-11-21 00:12

  • It could be any balance that is reasonable in relation to current value (eg not more than 15% higher than current value, not older than 6 months, and not prior to any contribution or non SEPP distribution made to the account.
  • First option to possibly avoid the rigidity and risks of a SEPP, would be checking into the age 55 separation exception and if the former plan will provide flexible distributions at least annually. The age 55 exception starts for separation IN THE YEAR the employee reaches 55 even if employee separated before their birthday.
  • If separation was too early for the age 55 exception or if the plan only allowed a lump sum distribution, a SEPP would then be warranted. But it is best NOT to use the RMD method because that method generates a distribution around 35% less than the amortization method. Further, the amortization method only requires ONE calculation and not a new calculation each year which increases the risk of error. Since the distribution under amortization is larger, that means the SEPP account balance can be smaller and the non SEPP IRA larger.

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