72t withdrawal strategy for married couple with 4 IRAs ?
I have a married couple with the following IRAs:
Husband: Age 56
IRA #1: $640,000
IRA #2: $200,000
Total: $840,000
Wife: Age 54
IRA #1: $1,300,000
IRA #2: $50,000
Total: $1,350,000
Skipping over the various reasons for this transaction for purpose of brevity, this couple wants to withdraw over the next 5 years an amount that will net them around $25,000/year. The gross amount pre state and federal taxes will be around $35,000 to $37,500.
Both are in excellent health. As you see above, the wife is 2 years younger and has approximately $500K, or 60%, more in her IRAs than the husband has in his IRAs.
The total to be withdrawn over 5 years ($35K x 5 = $175K) is roughly 8% of the current combined value of the four IRAs.
The specific question is this: Which IRA owner to take it from? From the younger spouse? Or from the spouse more likely to die sooner based on life expectancy (the older, male spouse)? Or from the spouse with the larger IRA value (the wife)?
Given that the variables in the calculation (accounts to include in the calculation, interest rate, life expectancy table, and distribution method) can be selected such that this $35K or so annually can be had from either of these spouses’ IRA’s, what strategy makes more economic sense? Assuming the older husband does die first, his IRA can be stretched sooner depending on who the primary bene is…does this matter much in this situation? Any other variables to consider here?
Many thanks.
Permalink Submitted by Alan - IRA critic on Fri, 2018-09-14 20:54
They need an IRA balance of roughly 720k to generate the desired 72t calculation. There may or may not be concerns from the spouses about their own IRA being the one drawn down, but the offset of that is that having just one plan is simpler than having a plan for each spouse using a proportion of their own IRA balance. I would ignore mortality as a variable since both are in good health and the plans will not run much beyond 59.5. Once the IRA amount for each spouse is determined, a non reportable transfer of the desired balance should be done before starting the plan. The highest legal interest rate would then be used for that plan. Another variable is that if these IRAs have any basis from non deductible contributions, using the spouse’s IRA with the highest % of basis will produce the 36,000 annual distribution with less taxes due. The type of investments in the IRAs is a factor with any illiquid investments not well suited for a 72t plan. Finally, the older spouse would receive a slightly higher distribution per dollar of account balance due to the 2 year age difference, and that means when partitioning the IRA to one of the desired balance, that balance would be somewhat smaller. Again, a very minor consideration.
Permalink Submitted by Mark Massey on Fri, 2018-09-14 22:33
Alan, many thanks for the thorough reply.Using the 72t distribution calculator at bankrate.com with the husband’s IRA currently valued at $640,000 and with these variables: 3.45% rate, ages 56 and 54, and joint life expectancy, it gives me an annual distribution of $35,322 under the fixed annuitization method. This is within a few hundred dollars of the gross amount desired of $35,000. Also, using same variables as above but changing to the single life expectancy table for the husband, provides the same payment above under the fixed annuitization method and a slightly higher annual payment of $35,486 under the fixed amortization method. Are both of the above calculations accurate and acceptable to the IRS?
Permalink Submitted by Alan - IRA critic on Fri, 2018-09-14 23:37
Yes, standard procedure is to use fixed amortization because it produces slightly more than annuitization. Similarly, the single life table is also used for the same reasons as produces more than either the Uniform or joint life tables. It is not clear why you indicated that the joint life table and single life tables produced the same calculation since a single life would be expected to have a shorter life expectancy than joint lives. Shorter LE will produce a higher payout. I used just a rough estimate of the payout being 5% of the account balance. You can specify any of the 3 tables or 3 methods, but the combination of Table I (single life) and fixed amortization should produce the highest payout per dollar of account balance. Of course, down the road, they can change to the RMD method (best effective on Jan 1) if they want to reduce the payout and preserve IRA assets.