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yearly distribution amount question
I did my calculations and I have a general question relating to the amount.
Let's say my max amount comes to 34k/yr.
Can I take 34k the first year and then 30k the next year and then 31k the next (as an example)? Or do I have to always take the same amount of 34k if that's what I start with?
That is a complicated question.
Generally, when you compute your 72t there are the three allowable methods: minimum distribution, amortization, and annuitization.
If you compute your 72t using the minimum distribution method, the amount is recomputed EVERY YEAR based upon the prior 12/31 account balance and life expectancy tables. The distribution amount can then go up or down, depending upon the growth or losses of the IRA that it is based upon and the change in your age.
If you compute it using the amortization or annuitization methods, the distribution amount is fixed and that is what you have to draw each year, to the penny, to meet the definition of "substantially equal payments based upon life expectancy". The sole general exception to that rule (excepting adjustments for stub years) is that you are allowed a one time change from using the amortization or annuitization methods over to the minimum distribution method without busting your plan. That change would usually involve a substantial decrease in the yearly distribution amount, so it isn't something you would want to do unless you truly didn't need the money or just had to in order to preserve your IRA principal funds.
That being said, there are some folks who have gotten private letter rulings where the IRS allowed yearly recomputations under the amortization method similar to the way the minimum distribution rules do it. However, PLRs are only valid for to the person they were issued to, and it can easily cost $10,000 or more to get one. If you use somebody else's PLR to design your own plan, you are gambling that the IRS will see it your way if they audit you because that other person's PLR isn't binding on the IRS in your case. And, there is also the issue that recomputations can again go both ways - you might again end up with more or less money year to year, depending upon the performance (gains or losses) of your underlying IRA.
The best thing to do with money you receive that you don't need is to simply re-invest it (maybe in a Roth, or otherwise somewhere it can grow where you can still get to it in case you need it in case of financial emergency without having to bust your 72t plan).
Sorry, I should have added it was the amortization method. Thank you for the reply.... you answered it for me.
I wasn't sure if I could go down on the amount once I started my deductions. Seeing that I can't, it does make sense to re-invest into a ROTH IRA.
Thanks again for the help 🙂
If you are still employed, or returned to the work force, or are self-employed, you can also use any excess funds to do tax deductible IRA, 401-K, or other retirement plan contributions, even while taking required SEPP 72-T distributions for plans set up in previous years. Whether these contributions are better into non-deductible ROTH accounts or deductible accounts depends upon your tax situation in any year. However, I do not recommend making a "non-deductible IRA contribution" because of the interaction with the IRS 8606 form which does a prorated calculation including ALL IRA account balances.