72t Planning

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L1: 72t PlanningMy wife is planning to retire in 2008, and we will set her up a 72t to start distributions in July 2008. She will leave employment at the end of March. She will take her pension as a lump sum, roll it into her 401k, and rollover all the monies into a Rollover IRA at Morgan Stanley.
Here are the key facts:
Date of Birth: 8/20/1956
Expected balance of Rollover IRA: $1,100,000
Our questions are as follows:
1.What month should/can we use as her IRA balance, i.e. May 2008 or June 2008?
2. Should the interest rate used coincide with the same month that we use for the balance?
3. Can we take a full year distribution, or are we required to take a pro-rata (6 months) distribution?
Appreciate your feedback.
2007-12-29 10:32, By: RetiredGene, IP: [67.77.80.148]

L2: 72t Planning1) You can use any month not longer than 6 months before the inception month, and after you are sure that all funds including trailing dividends have been transferred to the IRA. If the full 1.1 mil is not going to be used for the 72t, partition the desired amount from the first IRA to a second IRA and use the second one for the 72t balance.
2) Not necessarily. The interest rate applicable is limited to either of the two months preceding inception month. From the above you can see that the account balance could precede that period.
3) Your choice. Elect either the full annual or 50% of the annual for a July inception, but you cannot elect a figure in between.
She may want to consider what annuity options exist for the DB plan. While there are drawbacks to the annuity inflexibility, there are two factors that suggest a second look. One if that the Pension Protection Act starts to phase in higher interest rates next year to calculate lump sums (LSDs). Higher rates mean smaller LSDs. In addition, the mortality table used is unisex, ie it assume equal life expectancies. SInce females live longer, this makes the annuity relatively more attractive for females than males. This should be considered along with her family and health mortality indications. At least is it worth looking at before irrevocably electing the LSD. She may also want to consider NUA possibities if she has highly appreciated employer shares in the 401k,
2007-12-29 14:52, By: Alan S., IP: [24.116.165.60]

L2: 72t PlanningHello:
Congratulations on building a very nice retirement portfolio!
It is almost always best to keep your SEPP as simple as possible. The rules surrounding 72(t) are sufficiently complex that adding additional complexity to it is not usually helpful. In your position, I would take a full year distribution in July of 2008 and then switch to monthly or quarterly districutions in January 2009. This avoids the “stub year” considerations entirely.
Also, I would ask your custodian how they intend to code the 1099R for this SEPP. If they are willing to code it as a 2, then that will be preferred. If they will code it as a 1, you will need to file a form 5329 with your annual tax filing to claim the early withdrawal exemption under code 72(t).
A final comment would be that this web site maintains a number of really nice calculators that you can use to determine how much money is needed to generate the annual payment that you desire. Generally, it is a good idea to set up a SEPP that will deliver this amount to you and keep the rest of your IRA money in a separate IRA. Doing this allows you to take emergency money from your 2nd IRA without busting theIRA that is running the SEPP. You will have to pay regular income tax plus a 10% early withdrawal penalty on this money but that is still much better than busting your SEPP. If, at a later time, you decide that you want to systemitize additional withdrawals, you can always set up a 2nd SEPP on the 2nd IRA.
Ed2007-12-29 15:28, By: Ed_B, IP: [67.170.159.37]

L2: 72t PlanningTo expand on Alan”s answer to #2.. “Inception month” is the month when first payment will be received. Many new people to this forum seem to confuse the “setup” of a 72t with its inception. One of the two months (your choice) that immediately precede that “first payment month” can be used as max interest rate ceiling.
To comment on Ed-B”s suggestion about full year payment in first year, then switch to monthly in next year, I did a variation of that with my new Vanguard SEPP. In my setup document, Iasked for the first SEPP payment on that IRA(in May 2007) to be for 5 months, andalso instructed them to startregular monthly payments in June 2007, which gave me same full year payment in first year, and also started monthly flowfor the future without worrying about switching my payment plan at the beginning of the new year, and they did it flawlessly. If they don”t get it right, you have lots of time to fix it in first year, so the total adds up to the annual gross distribution that your SEPPplan calls for.
Final suggestions: Use the calcualtors on this site, and fill out the sample form on this web site to outline your plan details, and add where necessary to outline special payments in first year, etc. You may still be required to transfer a lot of that information to the custodian”s form, but feel Free to give them additional instructions, as I did for those special first year payments. Do not bother planning to recompute your payments each year, as it just add complexity and uncertainty to your plan. If the annual figure you work out is OK, make it one that you can stick with that for theyears you need this to run to its completion. Good Luck!
KEN
2007-12-30 05:42, By: Ken, IP: [75.67.65.254]

L2: 72t PlanningQuestion regarding changes in the Pension Protection Act for computing lump sum. Where can I find information to compare interest rates prior to 2008 vs. projected interest rates for 2008. Also, I was under the impression, a lower interest rate typically meant a larger lump sum?2008-01-17 10:55, By: RetiredGene, IP: [71.52.113.218]