Using a 72T to pay premiums
A 45 year old Client is contemplating rolling his existing $500K + Ira into a Roth, but in his tax bracket the cost is too great. Instead, we are contemplating using a 72T withdrawal to purchase a whole life contract. This will avoid the 10% penalty, help establish a Roth like benefit with permanent death benefit while making the yearly tax bill feasible. What are the roadblocks and paperwork necessary to accomplish this?
Permalink Submitted by Alan - IRA critic on Tue, 2021-05-25 19:13
14-15 years is a very long 72t plan, given that these plans are quite inflexible. The entire 500k IRA will be off limits to any distribution that exceeds the 72t calculation, so there is an opportunity cost. If the plan is busted for any reason in it’s later stages, it would result in many years of retroactive penalty and interest.
The up front plan documentation consists of a copy of the IRA opening balance statement, documentation of the interest rate used and month for that interest rate, and the resulting calculation. After that, the 1099R distribution is reported like any other IRA distribution except that a 5329 will be needed each year to claim the 72t penalty exception. A plan created for this purpose would likely include a single distribution of the calculated amount.