72(t) distribution requirements and how to fund

L1: 72(t) distribution requirements and how to fundIf you sign up for a 72(t) plan- what happens if your IRA is primarily in fixed income securities (i.e. CDs, bonds) and when the time comes for the annual distribution there is not enough “free cash” in the account? In other words, what happens if your annual distribution is 15,000 but the IRA only has 8,000 in cash with the remaining balance all invested in CDs and bonds?? Will the brokerage house redeem a CD or bond to handle this? Wouldn”t there be a penalty for this? Or, is the reality that you have to either make sure the CDs/bonds will spit off enough interest each year to cover the distribution, or you let a matured CC/bond go to the money market option and not reinvest it??2007-08-08 17:52, By: phillips27106, IP: [71.76.211.201]
L2: 72(t) distribution requirements and how to fundAlthough a 72t distribution can be in kind or in cash, due to risk of valuation discrepancies for in kind IRA distributions, let”s just assume that you and the IRA custodian must take the responsibility to have enough cash generated at some point in full calendar years of a 72t to be able to distribute the exact required distribution for the year.
To do that, you might have to incur an early withdrawal penalty on a CD or a bond might have to be sold at less than the value at maturity. The portion of a 72t IRA that must be distributed is less than 10% and therefore, it should not take much planning to maintain that level of cash in the account, at least for the times of the year you plan to take distributions. A money market fund is very appropriate for this purpose, and right now they are paying APYs very similar to what you would get with short term bonds.
2007-08-08 21:21, By: Alan S., IP: [24.116.165.60]

L2: 72(t) distribution requirements and how to fundHello phillips:
It is your responsibility to insure that there is sufficient free cash in the IRA to make a distribution whenever a distribution is called for. There are several PLRs (expensively obtained by taxpayers) who let there SEPP IRAs go on automatic pilot assuming the trustee would take care of these matters; which, of course, they most often do not.
Most trustee systems simply look at free cash on the date a distribution is supposed to occur and distribute in full if the cash is available and distribute less if less cash is available. Furthermore, if the lesser amount is distributed, often the trustee system does not tell you or notify you. This can inadvertently cause a “modification”. This was the essence of the PLRs referred to above; bit why even go there?
Instead, I advocate bypassing the trustee distribution systems entirely and taking over manual control of the distribution process by taking 1,2, or 3 distributions per year at your command when you know that the free cash is available.
TheBadger
wjstecker@wispertel.net
2007-08-09 04:50, By: TheBadger, IP: [72.42.66.26]

L2: 72(t) distribution requirements and how to fundThe key point here is PLANNING. You must make sure that the trustee/broker does NOT AUTOMATICALLY invest available cash, especially if you set up interest income and CDs to mature in a timely manner to be available for distributions, and HE reinvests the cash. As previously stated in this thread, and in prior postings, many of us PLAN by keeping 12 month”s of distributions in a money market account, especially since their interest/dividend rates are now about 5%. The slight “loss” in income is more than offset by the comfort level of having the cash always available for each year”s distributions. Income, and maturity/redemptions, above this figure can be reinvested.

2007-08-09 10:19, By: dlzallestaxes, IP: [151.197.41.70]