72T Rules – Client is 54
Hello. Have a client who is 54 years, 2 mo. He would like to start 72T on part of his Traditional IRA money. If he starts @ 54 1/2 and takes 5 payments until 59 1/2:
- Can the balance remain in the IRA?
- Do we have to shut off 72T payments?
- Which calculation method produces the most income?
- Should we just put enough in the IRA using 72T to deplete it with 72T payments?
Thanks,
Julie
Permalink Submitted by Alan - IRA critic on Tue, 2025-01-14 16:35
Not sure of your question 1. The 72t distributions cannot be rolled over and must remain outside of any retirement plan. If the desired 72t distribution can be generated with only a portion of the IRA balance, then the amount needed should be directly transferred to a new IRA before the first distribution. That IRA account will be subject to the 72t plan requirements and the other IRAs are completely outside the 72t plan.
The plan automatically ends at the later of age 59.5 or 5 years from the first distribution. Once that date passes, there are no restrictions on distributions, and they can be stopped.
With client’s age, I would recommend a full year’s distribution in 2025-2029. In 2030, there are 3 acceptable options, being 0 distributions, 4/12 of the annual assuming the plan will end in May on the date they reach 59.5, or a full annual.
The fixed amortization method produces the highest payout per dollar of IRA balance and the highest interest rate for either of the two months prior to the date of the first distribution should be selected. If that rate is under 5%, the 5% can be used as it is the minimum.
The 72t IRA account opening balance should have enough to produce the expected spending needs which will increase due to inflation. Since the 72t plan ends at 59.5, there will still be plenty left in the IRA, and the remaining balance could be recombined with the other IRA at that time, but NOT before the plan ends.