72t IRA Funded & Started Today – Questions
L1: 72t IRA Funded & Started Today – QuestionsHi,
My first post on this got lost somewhere. Anyway, I’ve just funded (from a larger IRA) a new dedicated 72t IRA today. Let’s say the amount is $100,000 for purposes of my questions.
1) Starting Date. I would like to start the 72t IRA today and have printed out the starting balance and transfer ledger from the IRA trustee. The IRS guy I just talked to indicated that should be sufficient, but he also left me with other unanswered questions. Before I go to those, does this record keeping start date (today) sound sufficient as long as my paperwork is tight?
2) The IRS agent told me that “you probably ought to use the precise amount” that the formula generates and not round down to the nearest dollar. Is this your understanding?
3) Do you know if I proceed ahead with the IRA trustee to distribute the 1st distribution at the end of this month, that it is okay to only have 4 distributions in a calendar year (Sept-Dec), or is there some arcane language somewhere whereby they want 12 distributions per year?
4) And now the primary confusion question. I am married, age 53 (just had b-day) and my wife is 48 and already had her b-day this year. She is my sole beneficiary. I am using the minimum distribution method on the $100k 72t IRA. I used your calculator and got the same life expectancy and distribution amount that I did on all other internet calculators ($269.39/mo.), and I was able to cross reference that with Table 1 from Appendix C of Pub 590. I was feeling good and fuzzy about this until a few minutes ago when the IRS guy told me I should be using Table 3 (Uniform Life Expectancy) because Table 1 is for the beneficiary of an IRA. I told him there was no life expectancy table under in Table 3 of the current Pub 590 under age 70. He couldn’t find it either. He wrote all my questions down and promised someone would get back to me someday.
What table should I be using (from the IRS) so that I can cross-reference it with your calculator and print out so that I can show how I derived the amount, and could someone point me to where in the IRS code it tells me to use this table? I’ve checked Revenue Ruling 2002-62, etc., and am getting confused.
I am truly grateful for any and all help you all provide!
2009-09-18 21:55, By: Ron, IP: [220.127.116.11]
L2: 72t IRA Funded & Started Today – Questions1. The starting date is the date is the date of the first distribution. You
have no choice in dates other than to determine when the first
distribution will occur.
2. Use the exact amount if doing an annual distribution. Divide the
annual by 12 and round if doing monthly distributions. 12 times the monthly should be
about .50 cents from the calculated annual amount.
3. Either 4/12s (if before the end of September) or the full annual
4. You can use single life expectancy – joint is not required. Look in IRS
Publication 590. 2009-09-18 22:24, By: Gfw, IP: [18.104.22.168]
L2: 72t IRA Funded & Started Today – QuestionsRon,
Revenue Ruling 2002-62 addresses the individual/joint issue in Section 1 prior to describing the 3 basic methods.
In a nutshell, you have a choice between individual and joint no matter which method you elect, but using a joint calculation adds to the math and reduces your payout. You will get a higher distribution out of your 100,000 or other starting amount in the following order from higher to lower:
1) Fixed dollar method using individual age
2) Fixed dollar method using joint ages
3) MD method using using individual age and Table I in Pub 590
4) MD method using the joint and last survivor Table II. The uniform table IIIstarts at 70 when you have no need for a SEPP and therefore can be considered inapplicable.
Also, note that if you use the MD (RMD) method, not only will you get a lower distribution per dollar of account balance, but you will lose the option of making the one time switch of the MD method if you want to reduce your payout down the road.2009-09-19 02:51, By: Alan S., IP: [22.214.171.124]
L3: 72t IRA Funded & Still a Couple QuestionsThanks for your reply(s). I’ve checked out Pub 590 and Revenue Ruling 2002-62, and still have a couple questions based upon my personal scenario, which is having started and funded a dedicated 72t IRA on 9/18/09 for $100k and requesting the first withdrawal on 9/30/09. Questions:
1) The language about interest rate is vague to me. It says…”The interest rate that may be
used is any interest rate that is not more than 120 percent of the
federal mid-term rate for either of the two months immediately
preceding the month in which the distribution begins.” If I begin my first withdrawal in September, does this mean that the interest rate I use must not be higher than either July, ’09 or Aug., ’09 fed mid-term rates? July’s was 3.32% and August’s was 3.37%. If it can’t be higher than either of these, then isn’t the forum’s published permissable rate for a withdrawal in Sept., ’09 of 3.37% wrong, or should it not be higher than 3.32%? The word “either” in the ruling seems vague to me here. I don’t want to start out using too high of interest rate, or accidentally misinterpret language and start out with a bust from the get-go.
2) I’m also stumbling on the permissable amount to be withdrawn in the first year, since I am both funding and withdrawing the first withdrawal in September of this year. If I calculate the starting amount ($100k) on 9/18/09 (IRA starting and funding date, complete with all paperwork) and take the first payment on 9/30/09, is it permissible to withdraw only 4 equal monthly amounts in 2009 and then recalculate at year’s end from year-end balance and new birthday for 2010 (I’m using RMD method) and go from there? Or do I have to withdraw a full 12 months worth in 2009? The IRS could not give me an answer on this and I’m still waiting for their “official” determination.
3) Also a quick question on starting time per 2002-42 IRB, p.711 paragraph “d”. Their language at the bottom of the left column, “…it would be reasonable to use the value either on December 31 of the prior year or on a date within a reasonable period before that year’s distribution”, gives me pause. I can’t use Dec. 31 of prior year, because I just started and funded the IRA on 9/18. I also want to begin the 1st withdrawal to increase income streams for a mortgage pre-approval letter that I should be getting today and I’ve included the $265/mo (I’m 53, my wife and benificiary is 48) that I’ve calculated off your calculator in that income stream. As long as I’m well documented with starting balance (from IRA trustee) and funding transaction (from trustee’s ledger on website), do you think this qualifies as a “reasonable period before that year’s distribution”?
2009-09-21 21:20, By: Ron, IP: [126.96.36.199]
L4: 72t IRA Funded & Still a Couple Questions1) Note that all this is immaterial if you are using the RMD method. That method does NOT use interest rates!
However, IF you were using a fixed dollar method as most do, the requirement is that the rate cannot be higher than the highest of the two prior monthly rates. It can be lower, all the way to -0- if you wish. Therefore, 3.37 is the highest rate you can use, ie. it is the highest of either July or August. However, I note that you plan to request the distribution on 9/30. The distribution could possibly be made on that date and then you have a Sept start instead of Oct….but that’s OK in this case because the 3.37 is the August rate and can therefore be used for either Sept or Oct!
2) See above. I would avoid requesting the distribution late in the month because you lose control of when it will be distributed. Your starting month is the date of distribution, NOT the date of request OR the date of receipt, or the date you select for your account balance. If the distribution is made in Sept, then you can take out either 4 months or 12 months this year. If it is in October, then your choice is 3 months or 12 months. This choice has been firmly established by the IRS.
3) Your 9/18 balance should be fine. You obviously cannot use an earlier date because the IRA was not funded till 9/18. Be sure all the assets that will be rolled to this are IN the account before you select the account balance. Beware of trailing dividends, etc.
My thinking is that your use of the RMD method with joint lives is somewhat risky because it requiresnew calculations every year, therefore several times the chances of making a calculation error than if you used a fixed dollar method. The fixed dollar method would also provide you with a higher distribution per dollar of account balance.
If you still want to use the RMD method, you MUST use your attained age as of 12/31 of each year and it will obviously increase by one each year.2009-09-21 23:59, By: Alan S., IP: [188.8.131.52]
L5: 72t Hopefully final question…Just spoke again with my IRA trustee and she indicated that even though I’m taking equal distributions on a monthly basis (towards the precribed year-end total), and that in my case, it is simply an in-house electronic journal from the dedicated 72t IRA to another regular brokerage/cash account with the same firm/trustee, that if something went horribly wrong (say for some reason a distribution didn’t get made in a particular month, or the reverse…say two distributions got accidentally made in a particular month), that the trustee could adjust by either adding or leaving out a SEPP (payment) to make the annual year-end amount exactly the right amount per the calcuation and start date. The 1099R that the IRS sees is year-end and she indicated as long as you have equal payment amounts and consistent (to the chosen method) year-end amounts, then you won’t have a bust.
Is this your understanding? If this is so, it takes a bit of the worry out of the equation.2009-09-23 20:58, By: Ron, IP: [184.108.40.206]
L6: 72t Hopefully final question…But, if the error occurs with the December distribution, and it’s late in the year, the broker may not be able to correct it by 12/31. This could bust your plan, with serious penalties ( 10% on the total of all cumulative distributions from the beginning of the plan).
Therefore, you should always plan to get your distributions at the beginning of months, at least no later than the 15th, and make sure that you don’t go on vacation in December until you get you payment, and hope that they don’t pay you a second time late in December.2009-09-23 21:10, By: dlzallestaxes, IP: [220.127.116.11]
L6: 72t Hopefully final question…>>Just spoke again with my IRA trustee and she indicated
Just get something in writing from an officer of the Company that they will pay all penalties associated with a busted plan.
You probably didn’t talk to your trustee, merely a clerk that probably wouldn’t be around when you have a problem. 2009-09-23 21:20, By: Gfw, IP: [18.104.22.168]
L4: 72t IRA Funded & Still a Couple Questions#1… It says…”The interest rate that may be used is any interest rate that is not more than 120 percent of the federal mid-term rate for either of the two months immediately preceding the month in which the distribution begins.”
Your confusion could stem from the part of the sentence that you made bold – re-read the entire sentence. The ratecan not exceed the higher of the 2 rates.
#2… If it can’t be higher than either of these, then isn’t the forum’s published permissable rate for a withdrawal in Sept., ’09 of 3.37% wrong
I do believe that 3.37 (the August rate) is higher than 3.32 (the July rate) so 3.37 is the maximum for September, not 3.32.2009-09-22 12:01, By: Gfw, IP: [22.214.171.124]