Change to 72t
I have a client who started a 72t distribution at age 53. He is now 58.5, so he still has another year left before he can make any changes to the distribution unless he changes from the current method to the RMD method.
I also know that he cannot normally transfer the IRA assets from one IRA to another.
However, if he does change to the RMD method, would that allow him to transfer to another IRA? For example, IRA “A” has a monthly payment of $1200. If he transferred to IRA “B” for a $500/mo. payment, would that be okay and ‘get around’ the ruling that an IRA owner can’t transfer assets out of an IRA once they start the 72t?
The reason I ask is that since he opened this account his wife has passed away and his health has taken a turn for the worse. His IRA balance has grown quite well despite his monthly withdrawals. He has one son and would like to protect these assets for him should he pass away. He’d like to transfer the assets to a deferred annuity that has a highest anniversary death benefit.
I believe he will need to wait a year to do this (when he is 59.5), but wanted to see if there is a “workaround” in this situation that would allow him to transfer now.
Thank you.
Permalink Submitted by Alan - IRA critic on Tue, 2022-04-19 22:33
A 72t IRA can be transferred to another custodian at anytime as long as it goes into a newly opened account, although the total of the 1099R forms received must still add to the correct total. However, if he wants to preserve assets, because his plan ends in 2023, he has an option to simply take 0 distributions in 2023 before the end of this plan. The ending date is the day he hits 59.5. He would take his last distribution this year. The one requirement is that by the end of this year he has taken 60 months worth of distributions since the plan began. He could do this AND take out nothing in 2023 as well.
Generally, the fewer changes the better at the end of a plan because any error will trigger retroactive penalties and interest back to the first year. And the more changes, the more IRS attention could be directed at his plan.
Of course, he can even preserve more assets by retroactively changing to the RMD method for 2022, which will reduce his total 2022 distribution. But the one time switch requires an entirely new calculation with a new RMD table of his choosing. This may attract IRS attention because his distribution will drop in 2022. But if he wants to do this and has not already exceeded the RMD method amount for 2022 he can do this retroactively to 1/1/2022 just by making the correct calculation and changing the distribution amount to the RMD method.
If his health is declining, might he not need the current distributions to pay for medical or final expenses?
Permalink Submitted by [email protected] on Wed, 2022-04-20 19:01
Thank you for this information. So, as I understand, if he wanted to transfer from his existing IRA to another IRA (annuity) to secure a minimum death benefit he could do so? FYI, he turns 59.5 in April 2023. The important thing is to time it so as to not skip any distributions and lower the annual amount he has been withdrawing, correct?As to the question regarding the need for income – sadly since he started the 72t his wife passed away. We elected to choose this as a Beneficial IRA (rather than inheriting as his own), since she was older and any withdrawals would not be subject to early withdrawal penalty. So he has a sizeable amount in that account and NQ assets to pull from as well. We considered the annuity for those funds, but that is not in his best interest since all retirement funds would be tied up either in a surrender schedule or in the 72t distribution for another year.
Permalink Submitted by Alan - IRA critic on Wed, 2022-04-20 19:40
Yes, he could do a direct transfer of the account to an IRA annuity. If so, I would suggest that before the transfer he withdraws the rest of his 2022 72t amount. He can then do the transfer and leave the IRA annuity untouched, at least until May, 2023 when his 72t plan has ended. He will then receive only his usual 1099R for 2022 in the usual amount and eliminate the risk of multiple transactions, an additional 1099R, and reducing his death benefit less by eliminating any distributions from the annuity he could have taken from the current IRA this year. As for the distributions, he is free to change the distribution pattern. All the IRS cares about is that the amount showing on the 1099R is correct, either the same as in prior years or the reduced amount if he switches to RMD for 2023.
Permalink Submitted by [email protected] on Thu, 2022-04-21 15:05
Once again, thank you Alan. I do have one follow-up question:You mention not taking any distributions until at least May 2023 when the 72t plan has ended. However, doesn’t he still need to withdraw money next year in the amount equal to the first four months of the year? For example, if his annual distribution is $12,000, would he need to withdraw $4000 (1/3 of the annual amount) since he does not turn 59.5 until April? This is assuming he does not switch to the RMD method. If he did switch to the RMD method, is he still responsible for some amount for the first four months of the year?
Permalink Submitted by Alan - IRA critic on Thu, 2022-04-21 15:24
He does not need to withdraw anything next year. He has a choice of withdrawing either a full annual, pro rate by the full month, ie 3/12 the annual amount, or nothing. Because these plans are calendar year plans, and his plan ends before the end of the 2023 calendar year, these options have been recognized by the IRS for over 20 years. As indicated earlier, there must have been at least 60 months worth of distributions taken by the end of 2022 for him to take nothing in 2023. But 0 seems to be the best fit for not only preservation of IRA balance for beneficiaries, but also fewer transactions that might not be done correctly.
If he switches to the RMD method as well, he still has the same options for 2023, but would reduce the 2022 distribution as well. Switching to RMD might attract IRS attention since the 2022 distribution will drop considerably unless his investment gains have increased his account balance a large amount from when the plan started. The RMD calculation can be easily done using the new 2022 RMD tables (any of them) and the 12/31/2021 account balance with age attained in 2022 to see how much the distribution will change. But taking 0 in 2023 should not attract any IRS attention, contrary to the one time switch.