72t at 59 1/2
L1: 72t at 59 1/2DOB 2/22/57, beneficiary 11/28/57
Will be 59 1/2 this year. Can a 72T be implemented? Goal is to start an income stream, rather than have a lump sum asset. Prefer not to annuitize
Thanks for feedback
2016-01-07 14:49, By: BobC, IP: [188.8.131.52]
L2: 72t at 59 1/2You do not understand the purpose of SEPP 72-T plans. They are for use by taxpayers who are under 59 1/2, and usually 5 or more years under. These plans are to create an exception to the 10% penalty for “early retirement” distributions from IRA, 401-K, etc. under a plan for “Substantially Equal Periodic Payments” (i.e. “SEPP”). BUT, they lock you into a fixed amount of annual distributions for a minimum of 5 years (60 months), and any deviation will subject you to the 10% penalty retroactively from the beginning, up to the age of 59 1/2.
As of 8/22/2016 you will be 59 1/2, and will be permitted to take whatever amount that you want, whenever you want, and no be subject to the 10% penalty for early distributions before 59 1/2. A SEPP 72-T plan makes no sense for you. Starting in August/Sept you can have your broker send you a monthly check for whatever amount you want, and you can change it whenever you want, and can even take extra distributions periodically for real estate taxes, vacations, etc.
I do not understand how you got to this site since it does not pertain to your situation.
By the way, if you have a 401-K, and stopped working in 2016, then you can take distributions from your 401-K if your employer permits it. Then after 8/22/2016 you can take distributions from your IRA or 401-K.
P.S. I assume that YOU are the primary beneficiary of your own retirement plan, and that your spouse/partner is the secondary beneficiary. She can roll over your IRA into hers when you die.2016-01-07 15:49, By: dlzallestaxes, IP: [184.108.40.206]
L3: 72t at 59 1/2Thanks for your response. I absolutely understand the purpose. The goal is to not to avoid the 10% penalty, but to turn the IRA “asset” into an income producing stream without purchasing an annuity and annuitizing.
For Medicaidpurposes, there is a dual treatment of assets and income. The treatment of an IRA that is pre-RMD is as an “asset”. However, the treatment of an IRA in 72t mode (or post-RMD) is the same as that of an annuity, without the annuity.
I am just not sure if one is permitted to begin a 72t arrangement in the year in which one turns 59 1/2.
And this is an existing IRA with spouse as beneficiary.2016-01-07 16:04, By: BobC, IP: [220.127.116.11]
L4: 72t at 59 1/2Annuities are insurance products that meet certain legal/tax requirements. The reason that they are not treated as assets is that you typically lose control of the asset.
72t is a section of the code that defines pre-age 59.5 penalty free distributions – it is not an annuity nor are distributions from it treated as an annuity for tax or legal purposes. You still retain control of the base value so it is not annuity – it is merely a type of distribution.
2016-01-07 16:42, By: Gfw, IP: [18.104.22.168]
L5: 72t at 59 1/2Interesting point GFW – had not considered it might then be treat as BOTH an asset and income, not helping with the planning scenario. Thank you.2016-01-07 16:55, By: BobC, IP: [22.214.171.124]
L6: 72t at 59 1/2Not sure about Medicaid eligibility since rules differ between states. In the federal guidelines I did not see any exemption from MAGI for retirement plan distributions received under a SEPP calculation. Medicaid eligibility for most states was changed due to the ACA and moved away from asset tests to an income test.
In any event, to answer your question, you can start a SEPP plan the day before you reach 59.5 if you want to and plan to live with the 5 years of restrictions on your distributions. And even if you bust the plan you only owe the penalty on distributions you took before 59.5. That means you could take a distribution of $10 as your first SEPP distribution the day before reaching 59.5, and if you bust the plan in the next 5 years you only owe a penalty of $1. You would have to file a 5329 each year if the IRA custodian codes your 1099R with a code 1 after you tell them you started a SEPP. Of course, I have never heard of anyone actually doing this, so you may want to re check your source that SEPP distributions do not count in MAGI determination for Medicaid purposes in your state.2016-01-07 17:18, By: Alan S, IP: [126.96.36.199]
L7: 72t at 59 1/2Thanks, Alan S. Appreciate your input.
We are more concerned about the value of the IRA $ in the “asset” category as there is more room in our scenarioon the “income” side of the equation.
If we can convert the IRA from “assets” to “income”…
But an earlier point suggested that Medicaid may view it BOTH as an asset and income as the account owner still can access the account value, which takes us back to using an annuity.2016-01-07 21:12, By: BobC, IP: [188.8.131.52]