New 72t Plan
I have a client who has two cash balance defined benefit plans from a former employer. She had elected to take a life annuity as she’s 53 years old, and needs approximately that amount of money ongoing for five years. I discussed 72t as an option, which she loved since she doesn’t have to annuitize her balance and is expecting a substantial inheritance. I’m wondering if I can combine the two lump sum rollovers into a single IRA and initiate the 72t either right away or shortly thereafter. It seems through my screening of forum posts she’d be able to use a recent balance for calculation purposes. I was planning on giving her the full lump sum for 2025, and then monthly payments for future years. If we have to use the 12/31 balance of the retirement plans, I’m thinking we may have to do two IRA’s with separate 72t payments but not quite sure. Any insight here is appreciated, thank you.
Permalink Submitted by Alan - IRA critic on Thu, 2025-05-29 16:07
The account balance is derived from the account for which the 72t plan is established. Therefore, if you wish to combine the direct rollovers into a single IRA, the balance of that IRA should be used for the calculation after both rollovers have been completed.
If the full balance will produce a higher distribution than needed, the balance not needed could be transferred out to another IRA that will not be part of the plan and therefore subject to penalty, but it will provide a safety factor in case more than the 72t amount is needed for an emergency. This must be done before starting the plan as it will intentionally change the account balance, and there can be no distributions or transfer between the date used to determine the opening balance and the start of the plan. This could also be done even if the entire balance will be needed as it would provide some insurance against busting the plan. If funds from the separate IRA will be needed consistently at some point, a second independent 72t plan could be started with the separate IRA. There is flexibility available, but that flexibility usually increases complexity and the chance for errors. Often, the setup should consider the client’s spending discipline and perceived chance of busting the plan by over spending or making an execution error.
Once the IRA will be tapped monthly, set up the payments for a date between the 5th and 20th of the month to avoid a year end snafu that would bust the plan.
Permalink Submitted by Joshua Paradis on Fri, 2025-05-30 17:28
Great info, thanks so much!