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72t Set Up
I’m an early retiree who’s considering setting up a 72T plan. I’ve been doing quite a bit of research to familiarize myself with the rules and how they would apply to me and my situation. I was feeling confident that moving forward was the right decision until I spoke to my accountant who knew nothing about 72T plans.
I am currently 51 (will be 52 in July) and single. Last October, I rolled over one of my 401K plans to an IRA with Fidelity. I have not taken any distributions or made any contributions since it was established. The balance on that account as of last Friday was $402,710.49 – I was able to print out a letter from Fidelity stating the account value. I’ve used your calculator and checked against others and come up with a consistent distribution amount from all of them.
Using my age 52 (the age I will turn on 7/11/2020), single life expectancy, 120% of Feb. 2020 Mid Term interest rate of 2.1%, and the account balance referenced above, all calculators are giving me an annual distribution $17,296 ($1,441.33 monthly) using the amortization method. My thought was to just set up automatic monthly distributions moving forward and prorate the year 1 distribution amount.
Hoping for validation of my calculations and any feedback on things I may be missing. My real concern has to do with being able to manage the tax filing piece of this if I am unable to find an accountant who knows about 72T plans.
Thanks for this site - it's an amazing resource!
Don't worry about finding a tax practitioner to file your tax returns. The tax preparer merely takes the figures from the form 1099-R from Fidelity which indicates the amount of the distribution, and he enters that figure into the tax software as taxable income (unless you ever had made any Non-Deductible IRA contributions to any Traditional IRA account). You might be able to even do your taxes yourself using available tax software, especially with the new increased Standard Deduction.
You might want to find a financial advisor to work with you to determine your cash needs until you are 59 1/2. Depending upon your tax picture for 2020, you might want to consider taking the full annual distribution for 2020, instead of prorating it. I'm fairly confident that your present accountant probably can do a projection of your tax picture for 2020, as well as until you are 59 1/2.
If you do not "need" all of the $ 17,296 in 2020, as well as in all years until you are 59 1/2, you might want to separate your IRA account into two accounts, one for your "SEPP 72-T UNIVERSE" (say $ 300,000), and leave the balance in a separate IRA account for future additional SEPP 72-T plans, or for emergency cash needs even if those might incur the 10% penalty on an occasional year that you might need it.
P.S. You should also look at the resource on this website to see if there are any other EXCEPTIONS TO THE 10% PENALTY FOR EARLY DISTRIBUTIONS" that might fit your situation.
Thanks so much for the feedback. Unfortunately, I don’t qualify for any of the other exceptions to the 10% penalty.
My long-term goal is to keep my income levels low enough to (1) minimize tax liability and (2) maintain reasonable healthcare costs (I currently receive healthcare subsidies to assist with premium payments). My short-term goal is to build a pool at the home I own outright.
In addition to this IRA, I have another smaller 401K ($100K) as well as a personal investment account made up solely of long-term capital gains investments ($450K).
Instead of cashing out $100K+ in stock, paying capital gains on a significant portion of it and losing my healthcare subsidy, what I’m hoping to do is establish an approved income stream so I can take out a small mortgage. Proceeds would be used to pay off all other debt (about $25K) and the remainder used to build the pool, all while lowering my monthly spend. If my calculations are correct, the annual distribution on this IRA is basically what I need to be able to qualify for that loan with very minimal tax implications on the distributions. Any additional 2020 income would come from a small amount of long-term cap gains.
I’m generally pretty confident in my ability to plan and manage my finances and seek out the right help when necessary. It’s been difficult to find anyone who knows about this stuff that isn’t trying to sell me something honestly. And of course, those “experts” try to put the fear of God in me that it’ll be a disaster if I don’t use their services.
Taking the full distribution for 2020 wouldn’t be a problem and likely simplifies things a bit I’d imagine.
My IRA is with Fidelity. I’m not sure how they code the 1099 but will check with them. If they notate the exception, I’m more confident that I could handle the tax filing myself.
Thank you very much for taking the time to provide me information – it’s much appreciated.
Almost all of the brokers and funds code the 1099-R distributions as a "1" (no known exception) because they do not know if you have other accounts, and they do not want to take the responsibility of using the "2" code. The 5329 form is a very easy form for you to have prepared by any tax software.
You seem to have a better financial acumen than most people who visit this site, and quite frankly better than many financial advisors and even tax preparers. Unless you have been fortunate enough that ALL of your investments in your non-retirement account are significant gains, you should be looking at selling losers (or break-even or low gain investments) to generate cash flow and to offset the losses against Capital Gain Dividends, Short-Term and Long-Term Capital Gains, and even $ 3,000/year against ordinary income. Since you mention that you are looking to still qualify for the health care subsidy, you should also consider the fact that if you can structure your income to stay in the 12% tax bracket ( which is up to $ 52,000 Gross Income, or $ 40,000 after the Standard Deduction), then your Long-Term Capital Gains are taxed at -0- % !!!!
You are making me feel much more confident about my ability to manage this – thank you!
I actually did run into some luck on the non-retirement investment side. The vast majority of those holdings are in fact significant gains. I exercised and held ISO stock options a few years back of a company that has since gone public and done pretty well. My exercise price was under $2/share and it’s currently sitting at about $66. It was up as far as $100 during the lock up period but has since settled back down. I do feel there is still more upside which is another reason I’m hesitant to sell off large chunks of it. I would prefer to slowly liquidate to limit tax liability and diversify some since having 80% of my non-retirement eggs in that basket makes me a little nervous. Getting this set up and done will allow me to move forward planning out that piece.
I’m very grateful to you for all the great advice and building my confidence levels!
You can also consider setting your non-retirement account up as a "margin account" to provide cash flow without any income taxes or 10% penalty. I do this with NUA-eligible taxpayers in the initial year, especially if they have significant wages or severance income before they retire that year.
Also, you should set up your non-retirement account as "specific identification". Otherwise all sales of less than the full holdings of any company will be handled on a FIFO basis AUTOMATICALLY, by IRS regulations. This can be especially important if you "reinvested dividends", which I never recommend in a non-retirement account because of how it complicates tax reporting for sales, among other investment philosophy reasons.