72t Distribution Calculation under IRS Notice 2022-6

Submitted by Tony Fox on Mon, 2022-07-25 18:35

I have a client who was originally going to perform a 72t distribution starting in April of this year. Due to some unexpected income he decided to delay until December of this year or perhaps January of next year. However, his balance has obviously continued to drop and thus the amount of income he may have expected to generate has also dropped. This brings up a few questions:

1. It is now my understanding, under IRS Notice 2022-6, that he can use up to 5% interest in determining which option to choose from, which will obviously increase the payment amounts (we were using the normal 120% back in March when we first looked into this) for him. Has there been any indication that this is a permanent increase? My worry is if we wait, this goes away and he would be stuck with a lower payment.

2. If we elect to do this sooner than later in order to make sure we can use the 5% option, I also understand that we can use any balance since 12/31 of last year in making this calculation under the same IRS notice. Is my understanding correct?

3. Does it matter which option we use for the 72t calculation in order to use the 5% option and the higher historical balance? He originally rolled over $1.5 million into the IRA in March, but the balance is now down to $1.376 million. The larger amount would obviously give him more income, but I want to make sure we can use that 5% rate with any of the methods. However, he would need to start income this year in order to use that value, correct? If we wait until January of 2023, we would need to use that balance for the calculation, correct? Thus, any additional market drops could further reduce his income calculation. If we were to take income in 2022 in order to use the higher valuation, does he have to take the full annual amount in 2022 or can he just start and take a payment in December for 1/12 of the annual amount calculated?

With his current balance and his age (54), I am coming up with $42,359 under the RMD method and $86,563 under the amortization method. I did not calculate the Annuitization method.

Thank you.



Submitted by Alan - IRA critic on Mon, 2022-07-25 20:01

  1. The 5% rate is not viewed as temporary. However, if the 120% mid term rates continue to increase the maximum rate could surpass the 5% at some point, and the 5% would become a floor rather than a ceiling for 72t distributions. Ironic that the IRS waited so long to avail use of a decent interest rate, and right after they finally did this, a series of steep interest rate increases started.
  2. Probably not. The balance used must stlll be “reasonable” in relation to the IRA balance when the plan goes into effect. The IRS has never defined what is “reasonable”, but my general impression is a balance reduction of over 15% since the date of the opening balance could be vulnerable to IRS challenge. Given the bear market, it would be safer to select a month end balance over the last 4 months that was not more than 15% higher than the current balance, and retain a copy of that month end statement with the documented calculation. In other words, a 12/31 balance would likely have been reasonable for a plan starting in March, but might be too high for a plan started now.  The whole process of opening balance selection is sort of a trade off between the recency of that balance and the % change before the first distribution.
  3. Since he down less than 10% since March, use of the opening March balance should be safe enough. The 5% rate can be used with any of the 2 fixed dollar methods. However, waiting to start the plan risks a larger decline and a longer time period since March. Of course, it also depends on how the IRA is invested. If the stock based holdings are light, the account value will not fluctuate as much.  The first year distribution can be  pro rated by the month (eg November first distribution, 2/12 of the annual is an option for Nov and Dec combined.)
  4. The annuitization method and the fixed amortization calculations are very close, with amortization slightly higher. The RMD method produces much less and should generally not be considered except for the one time switch that is allowed if distributions turn out to be higher than needed. RMD also requires a new calculation every year which increases the risk of error. Generally, the best plan is to use the highest interest rate and highest account value possible, and if that produces more than needed, partition the IRA into two accounts, one with the balance that produces the desired distribution and the other for emergencies or even a possible second plan down the road.


Submitted by [email protected] on Mon, 2022-07-25 20:45

Thank you!! I read the following on IRS notice 2022-06 regarding the balance, which is why I was wondering if we could use the 12/31/21 balance. He had about $1.9 million total at the end of 12/31, but when he rolled over the funds we split it into two IRA’s, one specifically for the 72t, but without knowing at that time about the 5% rule. Anyway, here is what the IRS notice said: (d) Account balance. For purposes of applying the required minimum distribution method, the account balance for a distribution year is determined under § 1.401(a)(9)-5. 8 For the fixed amortization and fixed annuitization methods, the account balance must be determined in a reasonable manner based on the facts and circumstances. The account balance will be treated as determined in a reasonable manner if it is the account balance on any date within the period that begins on December 31 of the year prior to the date of the first distribution and ends on the date of the first distribution.   Thanks as always!



Submitted by Alan - IRA critic on Tue, 2022-07-26 00:00

  • Update:  Bill Stecker is a foremost authority on 72t plans, and he has released an updated treatise following Notice 2022-6. Therefore, my second point above is dated. See p 48 in the following link for the update on guidelines for the opening account balance. That said, the article assumes that the account existed on 12/31 and had no activity until the plan’s first distribution. That was not the case here, therefore the oldest plan balance date would be the date that the partitioned IRA to fund the plan was created. After that date it no longer matters what the investment results were. These new guidelines might influence the paln starting date due to balance reset at the end of each year.
  • Corel Office Document (72tcalc.com.)


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