72t change to dates of disbursements
L1: 72t change to dates of disbursementsCanour clienttakehis 72tdistribution at the end of this year instead of in July? Can he take it in a lump sum or does he have to take it semi annually as he has in the past? Also, I have heard that you may changethe method for calculating the 72t one time, is that correct?2009-03-02 15:53, By: Barb, IP: [220.127.116.11]
L2: 72t change to dates of disbursements>Canour clienttakehis 72tdistribution at the end of this year instead of in July?
Yes. 72t payments are viewed by the IRS as annual payments, so the frequency of the payment portions within that year are irrelevant and can be changed at any time. Just make sure that the “end of the year” does not occur later than about 12/10. This will give the client time to correct any distribution errors that may occur before the next year begins.
>Can he take it in a lump sum or does he have to take it semi annually as he has in
Yes, an annual lump sum is allowed as long as the total amount distributed for that year is the same as was calculated when the 72t plan was set up.
>Also, I have heard that you may changethe method for calculating the 72t one
>time, is that correct?
Yes, it is. A 72t plan owner may change from the amortization or the annuitization methods to the minimum distribution method at any time. This is a 1-time event, though, so be careful with this. It cannot be undone at a later time without busting the 72t plan. Also, the payments under this calculation tend to be low, perhaps only 1/2 as much as that allowed by the other two calculation methods. Be very careful that this lower distribution does not result in a distribution that is too low to meet the client’s living expenses. The lower distribution amount is recalculated annually, unlike what is normally done with the other two methods.
2009-03-02 16:57, By: Ed_B, IP: [18.104.22.168]
L3: 72t change to dates of disbursementsEd, are you sure about the ability to convert semi-annual 72t distributions to annual distributions?
Natalie Choate’s book states: Examples of prohibited modifications of a SOSEPP include: _ Possibly, changing from annual payments to quarterly or monthly payments (or vice versa), even if the total payments for the year add up to the right amount, since there is no authority for the proposition that the size of individual payments in the series does not matter so long as the annual total is the same each year.Û
She reasons that since there is no explicit authority, such a change would not be wise in the absence of a PLR.2009-03-06 06:00, By: sodeldog, IP: [22.214.171.124]
L4: 72t change to dates of disbursements
The IRS has no way of knowing what our payment frequency is or whether or not it has been changed. All they get is the 1099-R from the custodian that shows the annual amount distributed.
While I cannot cite a specific instance of frequency irrelevance, I do know that numerous people have changed from one payment schedule to another, as best fit their needs at the time, with no challenge from the IRS. Whether this could come up during an IRS audit, I do not know. I suspect not but have no PLR data to back that up.
Here is some pertinent info that relates to Revenue Ruling 2002-62:
“(b) Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in 72(t)(1) will not be applicable. Pursuant to 72(t)(5), in the case of distributions from an IRA, the IRA owner is substituted for the employee for purposes of applying this exception.”
Note the phrase “not less frequently than annually”. This suggests that only the annual amount is relevant to this question.
I am sure that Alan or someone else on here who is more conversant with PLRs can cite a reference for the approach that distribution frequency is irrelavant, as long as the payments are made at least annually.
2009-03-06 17:58, By: Ed_B, IP: [126.96.36.199]
L5: 72t change to dates of disbursementsI agree with Ed. Natalie’s take is highly conservative being that the IRS has no record of busting a SEPP plan for unequal distribution timing within a tax year or from one tax year to the next.
In this context, the consensus of what is OK is a blend of PLRs both prior to 2002-62 and post 2002-62, 2002-62 itself along with the actual field results of IRS findings on an individual basis. Many more taxpayers make changes over their SEPP term than rigidly adhere to the initial schedule, and there is no record of problems. Of course, adherance to Natalie’s interpretation would probably result in fewer transfers or other changes that could be prone to execution error of a serious nature.
Another issue closely related to this one is the matter of interest rates. The Fed reserve site lists a slightly different mid term rate based on the distribution frequency, so this issue may also play into Natalie’s conclusion, ie the interest rate selected originally assumed a distribution frequency that should not be changed. But as above, the IRS has been accepting the annual mid term rate for whatever distribution pattern exists, and to my knowledge there have been no signs of any changes in the wind.
2009-03-06 21:32, By: Alan S., IP: [188.8.131.52]