L1: 72t investmentsAfter I base a 72t distribution from a sum of money (total amount in the IRA), can I then use some of that money to purchase investments like annuities to provide income to the IRA, to offset the withdrawals, within the IRA vehicle?2010-07-11 19:13, By: ravit, IP: [22.214.171.124]
L2: 72t investmentsFrom our planning pointers…
SEPP Custodial Account. Consider using a brokerage Custodial Account for your SEPP planthat allows you to choose investments from any source that you desire. Reallocating your investments within your custodial account is different from doing a Partial Transfer to a new Custodian. Partial transfers were rejected by the IRS in PLR 200925044 & PLR 200720023.
You will have maximum flexibility in investment choices. Check Vanguard – I have used their brokerage IRA for several years and they probably also have no load annuities if you are really looking for an annuity.2010-07-11 19:49, By: Gfw, IP: [126.96.36.199]
L3: 72t investmentsSo the amount of a 72t distribution is based on the amount of money in the IRA at the time the 72 is set up, regardless of how it is invested? I’m considering looking for an immediate annuity that will offset the cost of the distributions. And, would a 72t distribution be affected by an IRA gaining value?2010-07-12 17:55, By: ravit, IP: [188.8.131.52]
L4: 72t investmentsUnder normal circumstances, the ANNUAL distribution amount stays the same, regardless of the valuation of your investments, unless you chose re-calculation method, which usually is not recommended in normal situations.The only difference is you decision for the first calendar year on whether to take 100% of the annual amount, or the prorated portion based upon the date of the first distribution.2010-07-12 18:08, By: dlzallestaxes, IP: [184.108.40.206]
L5: 72t investmentsCan you please clarify your last remark:
“The only difference is you decision for the first calendar year on whether to take 100% of the annual amount, or the prorated portion based upon the date of the first distribution.
Am I allowed to take the 100% of the entire year’s annual amount in that first year , even if I only start in Oct of that year as an example??
I would have thought that a “year” is not a calendar year, but rather on the anniversary of the first payment ( which would relate to your “prorated portion ” remark).
2010-07-13 16:25, By: scorman, IP: [220.127.116.11]
L6: 72t investments>>I would have thought that a “year” is not a calendar year, but >>rather on the anniversary of the first paymentBased on your comment above, I would suggest that you do lots of reading before starting your plan in October.SEPP plans are always calendar year plans. The only exception is when the plan is subject to teh 5-Year rule and then only to the extent thatthere must be at least 5 annual distributions and no modifications may occur until after the end of the 5th year.2010-07-13 16:42, By: Gfw, IP: [18.104.22.168]
L7: 72t investments”Based on your comment above, I would suggest that you do lots of reading before starting your plan in October”
I have done my DD and have a firm understanding of the particulars.
My point is simple math …If I choose to take equal monthly payments starting in this mid Oct ie $1000/mo, then by definition I cannot have taken a full years’ $12000 for this year, but only $3000 in this calendar year.
However, if I choose to take an extra $9000 payment to make the “annual” amount, then is isn’t “equal” payments by any stretch.
If I average the $12000 over three payments of $4000 each, then next years’ equal payments of $1000/mo are NOT the same as this years’.
So to modify my original q which was NOT answered: How does one handle the “for the first calendar year on whether to take 100% of the annual amount”?
note: I have found my answer in a detailed older discussion:
so, I can take 3x$1000 for Oct -> Dec and then later in Dec take another $9000 as a single distribution to complete the annual $12000 for only this year.
Is any form required to define that $9000 distribution?
2010-07-13 17:07, By: scorman, IP: [22.214.171.124]
L8: 72t investmentsYes, you are correct that you can choose to take a full annual distribution in your first year or a pro rated amount. It does not matter HOW you break out these distributions as long as you have either taken out 3,000 or 12,000 by the end of that year, and your first distribution was made in October. You could take out $500 in October, nothing in November, and then determine whether you will take out 2,500 in December or 11,500 in December. The pattern can be totally random as the reference to “substantially equal” only refers to the amount taken out in each calendar year, not the pattern you decide on for your distributions.To continue the example, in your next calendar year, you must take out 12,000 by year end, but you can distribute it anytime of the year using a single lump sum distribution or any other number of distributions as long as the 12,000 has been taken out by year end. Most people choose to set up monthly or quarterly payments, but other options also comply.You asked about a form. There is no form required to reflect the pattern of your distributions. You will get a 1099R showing your total distributions, but if the custodian does not provide the exception code in Box 7, then you need to attach a 5329 to claim the exception yourself.2010-07-13 18:56, By: Alan S., IP: [126.96.36.199]
L9: 72t investmentsAlan,
Thx for your detailed response …it is very clear to me now
Stew2010-07-13 19:11, By: scorman, IP: [188.8.131.52]
L9: 72t investmentsAlan has done a great job answering your questions, but I want to expand on some of his last comments for clarity.In years past the custodian would use “Code 2” in Box 7 of IRS Form 1099-R which meant your distributions qualified for the exception to the10% early distribution penalty. However about three years ago the IRS muddied the water on using “Code 2” and now almost all custodians only issue “Code 1” in Box 7 which means “No known exception” to the 10% early distribution penalty. Along with this change came IRS Form 5329 which covers a miriad of tax sins, mostly how to report your need to pay penalties and interest. But the form also allows the taxpayer to claiman exception to the 10% penalty for distributions under 72(t) SEPP Plans.If you use one of the tax programs to prepare your annual tax returns, the program is quite nice about inserting and completing Form 5329 for you.Hope this helps.Jim2010-07-13 19:19, By: Jim, IP: [184.108.40.206]
L10: 72t investmentsNot to belabor a point, but rather to make a point, too many people believe that they “understand” SEPP 72-T or “have done my due diligence”, when in fact by their questions or responses to further questioning, make it obvious that they only thought so.There is nothing more basic than the following facts :1. “YEAR” means calendar year, not 12 months from the first distribution.2. “SUBSTANTIALLY EQUAL DISTRIBUTIONS” means only annually, not each distribution during any year.3. “FIRST YEAR OPTION” means only the prorata amount of the annual total based upon the month of the first distribution, or 100% of the annual distribution.If someone does not understand one or more of these basic concepts, then they should get the book and read it, or get professional guidance. Otherwise, 1 small misstep can cost a fortune in penalties. Further, it is important to do tax and cash flow planning for the current year and the following year(s) to help in making the decision about the first year, as well as to decide how much, by the “reverse calculator”, you need for the SEPP 72-T account, and how much to put into a 2nd account for future emergencies, or a 2nd SEPP 72-T later on.If someone does not understand this last paragraph, then they need to re-read my first paragraph.2010-07-14 01:28, By: dlzallestaxes, IP: [220.127.116.11]