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72t final distribution


Mike Copley
Posts: 3
Topic starter
(@mac64)
Eminent Member
Joined: 1 month ago

Hello, I was born in Jul 1964 for info purposes.

I started my 72t SEPP distributions on my birthday in Jul 2016 and my first modification date is 29 January 2024, when I turn 59-1/2.  I've been taking annual distributions every year on my birthday, file my 1099R and the necessary tax forms yearly.  To date, I've taken 6 distributions, including this year (2021), and will file my tax return come tax time in 2022.  As I look towards the end of my plan in a couple years, I need to know if I need take a final distribution (or 1/12th distribution) by 29 Jan 2024, given 2024 is a new tax year?  Or can I choose NOT to take a distribution in 2024?  IAW, I was wanting to make my Jul 2023 distribution my final 72t distribution before abandoning the plan I established in 2016.

I'm thinking since i won't be filing my 2024 return until 2025, I will be 60-1/2 by then and wouldn't think the IRS would expect another 72t distribution by me, but I want to be sure.  

Appreciate the assist and thank you.

 

mike C

11 Replies
twilliam
Posts: 17
(@twilliam)
Estimable Member
Joined: 2 years ago

Hello Mike C,

I've had this same question in recent past and it was answered by one of the (IMO) experts on this site who provides excellent guidance.  The response I received was that in the year you turn 59 1/2 you may choose to take a full distribution, a prorated distribution (1/12) or no distribution at all.  I have the same idea as you.  Although I'm only in year 3 of my plan, I'm 54 and I plan to take my final SEPP distribution in the year that I'm 58.  The way I interpret the rule, once we meet the age requirement to abandon the plan with no penalty, there's no requirement to take further distributions.  

I hope this helps and best of luck going forward!

- T

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1 Reply
Mike Copley
(@mac64)
Joined: 1 month ago

Eminent Member
Posts: 3

@twilliam thanks for the note.  The year i turn 59-1/2 is Jan 2024.  Tracy is suggesting I take a prorated amount in Jan, so I'll go that route to be on the conservative side.  besides, the more I can pull out at my lowest marginal tax rate the better as far as I'm concerned.  I might even just take a full distribution for this very reason. 

Good luck with your plan.  Mine has worked out good so far.  Mike

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Tracy
Posts: 21
Admin
(@tracy)
Honorable Member
Joined: 3 years ago

Whoa! I need to caution you, twilliam, you can NOT "abandon" your plan at age 58. You must take distributions until age 59 1/2 (or 5 years if you're older than 54 1/2 when you begin your SEPP). Mike, your safest bet is to take 1/12th of your annual distribution in January 2024. 

 

Tracy

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1 Reply
Mike Copley
(@mac64)
Joined: 1 month ago

Eminent Member
Posts: 3

@tracy Thanks Tracey for the guidance.  Can you confirm or deny that the rules for the year one reaches 59-1/2 allows for a "full, partial, or zero" distribution?  Even better, if you can point me to the source document that would be better. 

thanks again, Mike 

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twilliam
Posts: 17
(@twilliam)
Estimable Member
Joined: 2 years ago

Tracy, thank you for clearing that up for me! I was contemplating not taking a distribution at all during the year I turn 59 1/2. My 'first modification date' is July 31 of the year I turn 59. It's always been unclear to me If I'm required to take a SEPP distribution that final year or can I wait until July 31 of that final year and consider my SEPP plan satisfied according to the IRS, without taking any distribution during that year. So, in your opinion, my safest move would be to at least prorate that year with a distribution, if I don't take the full distribution.  

Thank you for your time and input!

- T

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Tracy
Posts: 21
Admin
(@tracy)
Honorable Member
Joined: 3 years ago

I haven't reviewed the specifics of your plan - feel free to post them or tell me where you've already posted them - but in general yes, you need to take distributions until you're 59 1/2 (or 5 years, see exception noted above). You're allowed to take distributions on any frequency (annually, quarterly, monthly, etc.) and most choose annually or monthly for simplicity's sake. So for example, if your first modification date is July 31 , you can take monthly distributions from January through July or 7/12 ths of your annual distribution anytime before July 31. And save all paperwork! Hopefully that's a little bit more clear.

Tracy

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dlzallestaxes@msn.com
Posts: 135
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 2 years ago

There are some conflicting ideas being thrown around. First, you must take at least 60 months' worth of distributions ("5 years").  Second, you cannot terminate your plan until the later of 60 months or age 59 1/2, whichever is later. If you start before you are age 54 1/2, then you cannot terminate your plan until you are 59 1/2.

If you start after you are 54 1/2, then you cannot terminate your plan until 60 months after you start. There is a misconception that if you start after 54 1/2, and for example, started in January of 2019 and take an annual distribution in Jan 2019, 2020, 2021, 2022, and 2023, that you have completed your responsibility. Even though you will have taken 5 annual distributions, the plan would not have been in place for 60 months, and you must wait until AFTER Jan 2024.

In Jan 2024, your plan will end. You have the option to take your annual distribution for 2024, 1/12 of your annual distribution, or -0 distribution in Jan 2024.

Starting in February 2024, your plan is over, and you can take any amount you want or need in the rest of 2024 because your plan no longer exists.

I agree with Tracy, and others, that it probably makes the most sense to take 1/12 of your annual distribution because I doubt if that would take you out of the 12% tax bracket. If you don't "need" more money, then it would usually make sense to do ROTH CONVERSIONS starting in 2024 when you are 59 1/2 until you are 72, and to defer your SS until you are 70. You should meet with an experienced Tax Practitioner or Financial Planner to scope out the plans until you are 75. This planning should include the Required Distributions by you and your surviving spouse, and ROTH CONVERSIONS, as well as the burden on your children to ultimately take the remaining balance in your IRA over 10 years because of the SECURE ACT, when your retirement plan will probably be 2, 3, or 4 times what it is today, because it will double every 12 years at a conservative 6% total of 2% dividends and 4% growth per year. In addition, consultants recommend taking out life insurance for your children to use to pay the income taxes that they will ultimately have as your IRA account grows. (This involves some extensive calculations on a spreadsheet.)

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dlzallestaxes@msn.com
Posts: 135
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 2 years ago

In addition, because your kids will be taxed in at least the 22% tax bracket, and possibly 24%, these professionals recommend that you do ROTH CONVERSIONS up to the limit of the 24% tax bracket. which is another discussion as to why.

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twilliam
Posts: 17
(@twilliam)
Estimable Member
Joined: 2 years ago

Hi Tracy, here's my specifics: 

  • Date of Birth: 1/30/1967
  • Current age: 54
  • 72t Method: Amortization
  • 72t Distribution Start Date: 7/12/2019
  • Life Table Used: Single
  • Stub Year (Y/N): N
  • AFR Rate used: 2.85
  • 72t plan starting balance: 735,914. in traditional 401k
  • Distribution amount: 35,159

From the start of my plan, I've been taking and will continue to take 1 annual distribution per year. Distribution 1 in July 2019, 2 in July 2020, 3 in July 2021, etc. I'm pretty sure my question was cleared up in the forum posts from yesterday. I plan to take my final SEPP distribution in July 2025 at the age of 58. Am I required to take a distribution at all in the year 2026 (the year I turn 59) or can I wait until I turn 59 1/2 ( first mod date Aug 2, 2026) without taking a distribution up to that date in 2026 and then consider my plan fulfilled and terminated after Aug 2?

- T

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dlzallestaxes@msn.com
Posts: 135
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 2 years ago

You will have to take distributions thru 2025 when you will be 58. In 2026 you will be 59 1/2 on 7/30/2026. Since you have been taking annual distributions since 7/2019 when you were 52 1/2, you do not have to take any distribution in 2026. If you do take a distribution in 2026, it can be only the full annual distribution, or 7/12 of the annual distribution, or -0-. This will depend upon your tax picture for 2026.

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twilliam
Posts: 17
(@twilliam)
Estimable Member
Joined: 2 years ago

Thank you very much for clearing that up for me.  Your input in this forum is priceless!! 

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