This forum is provided for informational purposes and it not intended to be relied upon as a source of investment, tax or legal advice. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of the 72tNET.com owners, or the sponsors or firms affiliated with the author(s). Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Please read our Forum Rules.
Refer to this template when submitting a new post https://72tnet.com/forum-template/. See the Tools and Resources menu for Distribution, Minimum Balance and First Modification Date calculators, current AFR rates, and other resources.
Edit your subscriptions by clicking on this link https://72tnet.com/community/subscriptions/ .
PLEASE NOTE: To avoid confusion, please do not add your question to someone else’s thread. If you have a question, please create your own post.
Mid-Term Fed rates
So the 120% of mid-term rates have dropped from 3% more or less to 0.5% or so in the last couple months. Obviously this is concerning for a 72t plan starting in the near future unless under the RMD method. This drastically changes things for many people. I was just curious about the rates and what drives them, as far as I can tell it is the bond market?? I'm a year out from starting my plan and had always figured I would be in the 2.5% range so now I am skeptical that it would possibly rebound back to its historical averages in a years time? I haven't seen anything that looks at the future trending of this rate and/or if it is directly tied to the bond or stock market trends? I'm still good to retire with 72t just a little disappointed!
The federal mid term rates are based upon the average market yields of Federal treasury bills having a maturity length falling between 3 and 9 years. These are actually the same rates you would use for tax purposes for things like making a family loan lasting between 3 and 9 years, for instance, to avoid applicability of the federal gift tax.
So, you will want to watch the mid term treasury rates to get a sense of where the AFR is going to fall. It doesn't look like they will be improving any time soon, though.
Thats what I am now expecting. I guess there is always the RMD method but I was really hoping the rates stayed in the 2.5-3 range! 0.5 is ridiculous and almost useless for 72t purposes!
I was wondering if anyone has ever asked for a Private Letter Ruling on interest rates.
The law only requires a “reasonable interest” rate be used in the calculation. In 2002 the IRS use a “rule” that defines the reasonable interest rate as 120% of the federal mid-term rate. The purpose was to prevent people from prematurely depleting their retirement accounts. In 2002 the mid-term rate was a reasonable choice of benchmark given the history of interest rates up to that point. Given the near zero percent interest rates these days, it not longer seems that the mid-term rate is a reasonable benchmark to use to prevent one from depleting their retirement. The “4% rule” (which is backed up by research) would suggest that the current benchmark is too low (I do realize that these are apple and orange interest rates) but the 4% rule would make a roughly 2.5% interest rate a more reasonable floor for 72t interest rate calculations.
While the 2002 rule was reasonable at the time, in retrospect it seems to be unreasonable give the recent history of ultra low interest rates (and given than people typically use equities for their investment returns not T-bills).
I think that you make an interesting point, with a thoughtful analysis. There are so many other issues in general today that I doubt that the IRS or Congress would ever re-visit this situation. I don't know how many taxpayers even know about the SEPP 72-T, let alone use it, but it is relatively limited number. Ironically, many/most tax preparers are not familiar with this technique, or this website.
Congress wouldn’t need to be involved. They defined the law as a “reasonable interest” rate. It was an IRS Rule. Not knowing anything about Private Letter Rulings, I am wondering if that would be a mechanism to address this issue.
I doubt that it would be anything that anyone would ever pursue. There is a fee of $ 10,000 to start a request for a PLR, plus usually a similar cost for an attorney. That makes it highly unlikely that this would be a cost-beneficial approach.
You could consider contacting your Congressional Representative, but I doubt that any of them would even understand it, and would probably consider it a waste of their time, especially since it would effect only a handful of people.
It looks like a personal (as apposed to a business) PLR starts at $2800.
quoted below from: https://www.irs.gov/pub/irs-irbs/irb20-01.pdf:
(4) Reduced user fee for a request for a letter ruling, method or period change, or closing agreement. A reduced user fee for a request involving a personal, exempt organization, governmental entity, or business tax issue is provided in the following situations if the person provides the certification described in paragraph (B)(1) of this appendix:
(a) Request involves a tax issue from a person with gross income (as determined under paragraphs (B)(2), (3), (4), and (5) of this appendix) of less than $250,000
(b) Request involves a tax issue from a person with gross income (as determined under paragraphs (B)(2), (3), (4), and (5) of this appendix) of less than $1 million and $250,000 or more.
I forgot that the IRS lowered the fee for individual PLR's.
However, yours is not eligible for a PLR because yours is not a "personal tax issue", which is defined as resulting from a tax return filing. You are looking for a change by Congress.
Congress didn’t define the rule of using the fed midterm rate, the IRS made that rule. At the time federal midterm rate was reasonable, now doesn’t seem to be.
Also the IRA FAQ for Rev Rule 2002-62 states that their calculation methods are not the only acceptable method for meeting 72t, but that “Another method may be used in a private letter ruling request, but, of course, it would be subject to individual analysis”
The IRS has 11 MILLION unopened envelopes. Do you really think they will care at all about addressing your request or complaint ? I interpret the wording you quoted as meaning that if you, or any taxpayer, decides to use any other interest rate, then they can pay for getting a PLR.
BTW, how much difference will this make in your annual distribution. Also, either in 2021 or 2022, the life expectancy is required to be increased by about 1,0, and the required annual distributions from IRAs will be reduced accordingly, as well as for SEPP 72-T plans.
I will be 50 next year when I plan to withdraw. Assuming a 4,000,000 balance a 0.5% rate would allow a maximum of $127,535. The average midterm rate since 2002 is a little over 3%. Using 3% would allow a withdrawal rate is $188,464. Assuming that I don’t recalculate annually that would be difference of $580,554 over the 9.5 years of the of these SEPP.
Using the “4% rule” would be $160,000, which would work out to $308,417 difference over 9.5 years without annual recalculation.
WOW. You have made great investments. There isn't much I can do to help you.
Some good investments over the year plus a big investment in TSLA the summer of 2019 (I thought at the time that I could easily get a 50% return within a year).
Apple turned out to be an excellent investment too. I have a new client who bought 100 shares in 1997 for $ 2,500. Thru the various stock splits, now has 9,000 shares worth $ 4.5 million !!! Not many investors hold onto specific stocks over long periods of time when they are growing quickly. And especially thru the 2008-2009 and March-June 2020 collapses. Fortunately theirs is in a non-retirement account with only a 15% long-term capital gains tax, and a step up in basis at death (under current laws). Yours will be taxed at ordinary tax rates up to 37% to you or your non-spousal beneficiaries, who will have to take distributions over no more than 10 years, on top of their other income, in accordance with the CARES ACT of 3/27/2020. I hope you have a lot of life insurance to cover the INCOME TAXES the next generation will be subject to when they inherit your IRA, and take distributions. (No step up in basis for IRAs.) You will probably want to do ROTH CONVERSIONS from age 59 1/2 to age 72, if you have money outside of your IRA to pay the taxes.