72t, using a one time change in calculation
L1: 72t, using a one time change in calculationWe have inherited a client who will complete his 72t obligation this year (2009). We don’t know what calculation was used initially to generate his first 72t (Annuitization, Ammonization or MDR). Our question is, if his 72t was calculated from an MDR formula could it be changed to ammonization or annuitization? Conversely, if his 72t was calculated as an ammonization could it be changed to an MDR or annuitization?
We understand thatour client is allowed aone time change only to the calculation of his 72t.
Thank you for your help
2009-07-23 20:15, By: Barb, IP: [184.108.40.206]
L2: 72t, using a one time change in calculationBarb:
The only allowable change is from either Ammortizaton or Annuitization to RMD, which I think you are calling MDR. It’s a “one-way-street” and can’t be undone.
My biggest question is why are you considering making the change so late in the final year? When you do the calculation, which is based on the 12/31/2008 account balance, you will probablydiscover that you have already distributed more than the allowable amount, assuming monthly or quarterly distributions. If you will provide distribution data we can be of more assistance.
Jim2009-07-23 21:18, By: Jim, IP: [220.127.116.11]
L3: 72t, using a one time change in calculationJim:
The reason we want to make the one time recalculation is he doesn’t need as much money so a lower distribution would create a tax savings.
For clarification sake, are you saying that if our client’s initial 72t calculation was done via an RMD formula we can’t use the RMD formula for this one time recalculation?
Once again… thanks for your help
Barb2009-07-24 13:30, By: Barb, IP: [18.104.22.168]
L4: 72t, using a one time change in calculation”For clarification sake, are you saying that if our client’s initial 72t calculation was done via an RMD formula we can’t use the RMD formula for this one time recalculation?”
Yes, your statement is correct. The “one-time change” to the RMD method is for a change from either the Ammortization or Annuitization methods.
If your client’s initial 72(t) calculations were based on the RMD method, then he / she would have to recalculate each year based on the new, 12/31/XXX account balance. So if you are already using the RMD method, there is nothing to “change to” at this point. The “72(t) RMD method” works just like the “70 1/2 RMD method,” just with a smaller divisor for a youngerperson.
My suggestion is to examine all of your client’s past annual statements to determine what the total annual distributions have beenin previous years. If it’s the same amount each year, then it was probably set up as either the Ammortization or Annuitization methods. Check further to determine an account value near the time of the first distribution. Then use the calculators on this site and attempt to confirm which method was used. Hopefully the interest rate used was not one of the “assumed rates” like 6% or 8% or something outside of the 120% max rate. If this is the case then the plan was probably”busted” from day one.
If the distribution amount has varried each year, then you have a lot of research to do to figure out what happened. Was it calculated using RMD or just some “made-up” amount that was “reasonable” but wrong?Get the calculations from the person who set it up originally. (Your client should have copies.) Send that person a letter requesting these documents and you should not have a problem getting them.
Jim2009-07-24 13:56, By: Jim, IP: [22.214.171.124]
L5: 72t, using a one time change in calculationOne final thought. Since your client will complete 72(t) requirements this year, saving taxes vs potentially busting a plan and becoming liable for penalties and interest from the first distributionis not worth trying to force a change to the RMD method.
Jim2009-07-24 14:01, By: Jim, IP: [126.96.36.199]