72T – Changing Methods

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L1: 72T – Changing Methods
Question: I may have duplicated this question in the forum by accident
I know someone who setup a 72T a few years back and is currently 53 years old. It seems the amount they initiated at the onset of this 72T is too high for their current needs and would like to lower the amount. My understanding is that you may change the
amount only once and it has to be changed to the RMD Method. Not sure if that is correct?
Assuming they can change this amount and it is to the RMD Method, is there a new calculation determining how much the new amount will be or can this person determine the amount? Also, is there new paperwork to be filled out?

Thanks in advance for your assistance,

2011-09-26 15:48, By: Mike, IP: []

L2: 72T – Changing Methods
>>Not sure if that is correct?
You are correct, but it is probably too late to make the change for 2011.
>>is there a new calculation determining how much the new amount will be
Yes there is a formula. Each year after the election, you would use the previous 12/31 balance, the attained age as of 12/31 of the calculation year. The payment must be recalculated in the same way each year until the plan ends.

So if the change were made for 2012, you would use the account balance as of 12/31/2011 and attained age as of 12/31/2012. Next year, same process.
No paperwork, just keep really good documentation.

2011-09-26 16:01, By: Gfw, IP: []

L2: 72T – Changing Methods
The one time change to RMD is only recommended for a new calendar year. I did it in 2010, which was last year for the SEPP plan, and it reduced my payments by about 55% in 2010 on an over 5% reasonable rate AMORT plan that started in March 2006. First,
use the 12/31/2011 year end balance in the SEPP IRA(s)and the calculator on this site, and plug in new age they will attain
at end of next year (the new yr of payments), along with the balance. If that new figure seems to solve the problem, and is not too little, then inform custodian of the change you are making and supply them with
new periodic payment amount for the new year (divide total by # of pmnts they receive, ie. monthly ,or Qtrly, etc.) At end of first year on RMD, and each year thereafter until passing age 59 1/2 in this case, they have to
repeat the annual year end recalculation exercise with newest Yr End balance and new attained age in the following year, and submit new payment amount to custodian. In December 2009, (after receiving the DEC payment
on the 6th) Itold my custodian to suspendmonthly payments until I supplied them with new monthly amount for 2010, from my RMD change calculation, and they did it perfectly. If custodianissues JAN 2012 payment before theycan change it, just subtract it
from that year’s RMD total, and divide the remaining $$ by the remaining # of payments to give them new payment amount thru 12/YY.Very important to remember to do the recalc each year…Perhaps the custodian will accept a standing order to stop payments
after DEC eachyear, so you/they don’t forget to submit new amount.. KEN
2011-09-26 16:06, By: Ken, IP: []

L3: 72T – Changing Methods
Also, be sure to keep in mind that a 53 year old has another 6+ years to maintain the 72t plan, and the MD method can result in some wild fluctuations for each year’s annual calculation if the IRA holds volatile investments.
Otherwise, large market swings can either lower the annual distribution even more than the first MD calculation OR can increase the distribution by a considerable % if the market has large gains. We seem to be in an era of large swings both ways. For a long
tenured plan, keep potential losses in mind when analyzing whether the one time switch is advisable.

2011-09-26 23:02, By: Alan S., IP: []

L4: changing distribution method
That’s good advice. My wife bought a variable annuity when she retired at age 51 (04/2004) , seven years ago. Took the equal payment 72t option giving her the largest monthly payment possible. This was great when the market was upswinging; not so great
now and I wish she could stop distributions completely but of course can’t til she’s 59 1/2.
I didn’t know until now about the one-time authorized change to RMD that’s allowed. So, if I understand this, she just needs to notify her financial institute to change the method beginning 2012? Also, no notification or forms to fill out fo IRS?
This is a great website!
2011-10-04 02:19, By: moyer02, IP: []

L5: changing distribution method
Yes. It is only the DISTRIBUTION AMOUNT FROM THE SEPP 72-T IRA that changes. The annuity investment stays the same, and so does the payment from the variable annuity to the IRA.
2011-10-04 02:50, By: dlzallestaxes, IP: []

L5: changing distribution method
Moyer, I am guessing that the custodian will not get involved in computing her new RMD each year, but would be glad to start paying a new amount each yaer based on her input. The calculator on this site will compute RMD value. Remember to use the age
attained by end of the year you are calculating payments for. If they will compute it, double check their work using this site calculator. Footnote– Is the 72T based on this variable annuity you mentioned, or a separate IRA??? IF on the annuity, my advice
may not apply. I am not well versed on annuities as 72t plans. KEN
2011-10-04 03:18, By: Ken, IP: []

L6: changing distribution method
I believe that Ken meant to say that your broker/advisor/custodian will not make her own RMD calculations under the MD method, but will be glad to use YOUR input ( not “her” input).
Like Ken, I am not an expert on variable annuities in SEPP 72-T plans. I do not know if they have some special provision. If not, then yoiu have to be careful because the annuity plan calculations may be inconsistent with the SEPP 72-T regulations and calculations.
What I mean is that the distributions FROM the annuity to the SEPP 72-T may not be identical to the annual distributions required to be made by the SEPP 72-T regardless of the amounts received by the SEPP 72-T from the annuity.
2011-10-04 03:30, By: dlzallestaxes, IP: []

L7: changing distribution method
DLZ, In my reply to MOYER, I used “her” because he was talking about his wife’s annuity and her 72t plan.
2011-10-04 12:36, By: Ken, IP: []

L8: changing distribution method
I missed the change of postings being replied to. That’s a problem when we have more than one discussion in the same thread.
You did start your response with MOYER. I should have picked up on your responding to that posting and not the original one.
2011-10-04 14:03, By: dlzallestaxes, IP: []

L6: changing distribution method
Ken, thanks for the info. Think it applies to variable annuity too. Bill
2011-10-04 03:31, By: moyer02, IP: []

L7: changing distribution method
Bill… you are right. If the variable annuity is merely being used as an investment – like any other investment – where the distributions are withdrawals (and not as an annuity payment), the treatment is the same.
2011-10-04 11:36, By: Gfw, IP: []

L8: changing distribution method
Moyer appears to be indicating that the account is a NQ annuity and there is no IRA. If so, the plan is a 72q plan, which the IRS has recognized as qualified for the same rules and considerations as a 72t plan from an IRA. That would include the one time
switch to the MD method that will typically reduce the annual distribution by around 40%. However, this 40% assumes no investment value changes, and if the account balance is lower than the original opening annuity balance, the reduction of the payout would
combine both reductions. Therefore, the possibility that this switch could produce an inadequate distribution amount each year until the plan modification date. That date does not change, it is the same as the original plan ending date.
2011-10-04 17:02, By: Alan S., IP: []

L9: changing distribution method
Thanks for the heads up, and the lesson about these types of plans.
It might be helpful to have a description narrative about various types of plans permanently on this site for reference.
2011-10-04 19:17, By: dlzallestaxes, IP: []

L10: changing distribution method
There is really no difference between an IRA using a mutual fund as an investment and an IRA using a deferred (fixed or variable) annuity as an investment. Same is true of a non-tax qualified annuity that creates a SEPP (under 72(q)) that uses a fixed or
variable annuity as an investment.
Only when the annuity is actually annuitized do things change. At that point, the insurance company that issues the annuity should be contacted.
Hope this helps.
2011-10-04 19:35, By: Gfw, IP: []

L11: changing distribution method
Check with the annuity company to make the change to the RMD method. My “guess” is that the company probably made the calculations and began distributions based on either the Amortization or Annuitization methods. They should be able to make the RMD calcuations
now and for subsequent years, and all calculations should be accurate and in agreement with the calculators on this site.
Atleast that’s been my experience woking with VA companies.
Jim F
2011-10-07 15:10, By: Jim F, IP: []

L12: changing distribution method
While the current distribution exceeds your needs, this will be a long term plan by the time it ends at 59.5 and that means the cost to bust it will be considerable with years of interest added to any penalties.
Therefore, since you can make the one time switch at any time, be sure to save some of the excess contributions you are getting now as insurance against inconsistent and inadequate distribution amounts under the MD method. Until
you acquire at least 12-18 months worth of living costs in your after tax savings account or are assured of other funding, I would hesitate to actually make this one time switch. Remember, the time you have remaining in your plan is close to the length of
a typical 72t plan and things can happen to increase your living costs besides just inflation. Tax increases and unexpected medical or health insurance costs are just a couple examples of this.
In summary, perhaps youshould consider a delay inmaking this switch for another year or so.
2011-10-08 01:03, By: Alan S., IP: []