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Is rebalancing funds allowed while taking 72t distribution ?


toLive
Posts: 2
Topic starter
(@tolive)
Active Member
Joined: 5 months ago

I am 54 and my wife and I plan to fully retire in the coming months, I see there will be a need to rebalance holdings in rollover IRA account while taking the distribution, is that allowed? My second question is - is there a step-by-step guide for setting 72t up in either Fidelity or Vanguard ?  Thanks for the help.

4 Replies
dlzallestaxes@msn.com
Posts: 132
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 2 years ago

We would appreciate if you would start by completing the "TEMPLATE". That will provide us with the information needed to respond better than with generalities.

From the minimal information that you provided, my first questions would be your dates of birth, and if either or both of you work for companies in which your accounts include company stock which has appreciated moderately, or significantly.

If either of you will become 55 before 12/31/2021, because you can be eligible for a special provision under IRS "separation from service" guidelines which are exceptions to the 10% Early Distribution Penalty, or other exceptions, including the SEPP 72-T exception.

In addition, if you have 401-K accounts with company stock, then the first approach to consider is not a SEPP 72-T plan, but rather a special IRS tax provision called NUA ("Net Unrealized Appreciation in Employer shares"). This could save you thousands, or even hundreds of thousands of federal taxes (and possibly state taxes, depending upon your residency). If so, then ask your respective HR departments for the "NUA COST BASIS" of your respective accounts. There are specific regulations concerning this tax provision on this website, in any tax reference guide (like J K Lasser which is written in "peoplese", and is in most libraries), on the internet, or at irs.gov.

As far as "rebalancing" your holdings, within the specific accounts that you select to be part of your respective SEPP 72-T IRA UNIVERSES, there are no restrictions. You can buy and sell stocks, bonds, mutual funds, etc. WITHIN these accounts, but you cannot make any additional contributions TO any of these accounts.

Another important aspect of planning for SEPP 72-T plans is to use the MAXIMUM SEPP 72-T PLAN CALCULATOR on this website. This will help you to determine the MAXIMUM balance to transfer to a SEPARATE IRA account to provide the ANNUAL DISTRIBUTION you want or need. In addition, you have to decide if you want the federal (and state) income taxes withheld, or if you are going to file quarterly estimates, if applicable. In this way, you can set aside any IRA balances above this amount into a different IRA account (or it is usually the balance remaining after the SEPP 72-T amount is transferred to a new account, either way is acceptable). This could provide additional funds to be available for future additional SEPP 72-T plans to be set up n the future, or for occasional other distributions which would incur a 0% early distribution penalty, but would not "bust" the SEPP 72-T plan.

You should be doing a TAX PROJECTION for 2021 (and future years thru age 59 1/2), in addition to the CASH FLOW projection. I strongly recommend that you retain an experienced, professional tax and/or financial planning advisor 9 which is more than just a tax return preparer) to do these projections. Under most circumstances, I usually recommend also that consideration be given to deferring your SS Benefits to age 70, while also considering whether your wife should take hers at 62, 67, or 70, depending which of you has the higher benefit. 

Also, if you have significant IRA balances, then you should seriously consider ROTH CONVERSIONS to the extent that you have non-retirement accounts to cover the taxes, especially if you have children. You should become familiar with the SECURE ACT, and the fact that after you and your wife die, the remaining balance in you taxable TRADITIONAL IRA (and ROTH IRA) will be REQUIRED to be distributed to your children ovr no more than 10 years. That will become added to their other taxable income, probably at the height of their earning years, which could be taxed at very high rates. Depending upon client situations, I have been recommending doing ROTH CONVERSIONS up to the limits of the 24% tax bracket, stating now.

You are starting at the correct time as the EQUIRED 5-year period which could end at 59 1/2 would ideally start at 54 1/2.

 

As you can see, there is much more to consider than just starting a SEPP 72-T PLAN (for each of you, because there aren't any JOINT SEPP 72-T plans allowed, if applicable). There is extensive PLANNING that should be done.

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1 Reply
dlzallestaxes@msn.com
(@dlzallestaxesmsn-com)
Joined: 2 years ago

Illustrious Member
Posts: 132

P.S. Fidelity or Vanguard do not usually care, and do not require any documentation, and surprisingly, neither does the IRS, unless they audit you for some reason. But YOU need to prepare the applicable documentation INITIALLY, and have it available in case it is ever needed.

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toLive
Posts: 2
Topic starter
(@tolive)
Active Member
Joined: 5 months ago

Thank you for taking the time to answer my questions.

I will be 54 and 1/2 in July, 2021.  Our assets are mostly in roll-over IRA accounts, no 401k money.  I figured we probably need 100k pre-tax annually to live on if factoring in vacations, etc.  I am having too much headaches in my job, and plan to live a life with more freedom.

I have been doing a lot of research on retirement recently, Personal Capital's simulation shows there is 99% chance I will be able to meet our goal, yet I feel uneasy knowing the paycheck will stop coming in a month.  I guess I have to take a leap and see how things go.

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dlzallestaxes@msn.com
Posts: 132
(@dlzallestaxesmsn-com)
Illustrious Member
Joined: 2 years ago

You didn't provide us with the template for your situation,, nor answer my various questions. So, we really cannot help you any more. 

If you want to "see how it goes", then make sure not to put all of your IRA accounts or amounts into the 1st SEPP 72-T plan

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