About to Start New 72(t)
L1: About to Start New 72(t)Hi. Been planning this for years and about to start my 72(t) from a traditional IRA.
Traditional IRA Balance: 345,415.12 as of 8/31/2016 statement
Date of first distribution: One day this week, but lets say 9/20/2016
Mid Term Rate I’ll use: 1.71%
Life Expectancy from Pub 590: 46.5 years
Distribution method: Amortization – I will be pro-rating the 2016 distribution
Annual Amount: $10,829.03 (pro rated in 2016- $3609.63)
I verified all numbers using the calculator here, MS Excel, and the old fashioned calculator method, but feel free to double check me.
Background info: Been planning this for years. Last few years I’ve been living off qualified dividends from brokerage account (to test things out)and socking away pretty much all of my income in various investments. Leftwork earlier this year. Absolutely no debt (just the usual utilities, food, gas for car, fun, thattype of stuff)
Going forward in 2017, my income will primarily be qualified dividends, so I figure I set up a 72(t) on this IRA. It will basically draw out just the dividends from this IRA account, plus I’ll be in a low tax bracket, so federal income taxes will be next to nothing, state taxes very minor.
I have other funds socked away in brokerage, traditional, and a roth IRA I can get to in case of emergency. I am aware I cannot break this 72(t) until I turn 59.5. Really, setting up this 72(t) is just for extra discretionary, but also I can pull it out with very little taxes. (honestly, most of the distributions will probably just find there way back to my brokerage account)
Depending on how things go, in 10-15 years, I may switch to the RMD method if it produces more $
I will keep a record of everything, statement with balance, and the worksheet provided here.
I guess I really only have 2 questions…
1 – How crazy am I for attempting this at my age. Feel free tobe brutally honest.
2 – I am currently single and my niece is set up as the beneficiary on the upcoming 72(t) IRA. If I were to get married down the road and change the primary beneficiary to a future wife, does that count as some kind of modification and bust the plan?
Thanks for any feedback. This is the most useful sight on 72(t)/SEPP2016-09-19 16:38, By: brkr12002, IP: [126.96.36.199]
L2: About to Start New 72(t)Changing the beneficiary is not a modification, and does not bust the plan.
You did not indicate that you have any provision for health insurance.
If you are in the 15% or lower tax bracket, then qualified dividends and capital gains in your non-retirement account(s) are taxed at a 0% tax rate.
The SEPP 72-T distributions will be taxable income. You have to withdraw $ 10,xxx each year, which should be doable just from the income the SEPP IRA account generates. It doesn’t matter whether the income is qualified or non-qualified dividends, interest, capital gains, or principal, they are all taxed as ordinary income as IRA withdrawals.
2016-09-19 17:07, By: dlzallestaxes, IP: [188.8.131.52]
L3: About to Start New 72(t)Thanks dlz, I thought that was the case on the bene, but just wanted to be 100% certain.
I do have health insurance still (COBRA), but exploring my options. This is my biggest expense, so researching ACA and catastrophic coverage to see what is out there and the cost. I’m really healthy fortunately, but you never know. For dental, I just pay cash for routine cleanings. For vision, I just go to Wally World every couple years (way cheaper than a vision plan).
Also, I will be doing some part time work next year at the local college, so I’ll have group insurance available there as well asan option and I believe an HSA. I’ll just be deferring all of that income into the retirement plan.
You hit the nail on the head about the 15% tax bracket. I should be in the 15% tax bracket this year and going forward, so the qualified dividends won’t have any federal tax. Also part of the reason I want to do the 72(t) and don’t mind reinvesting back into the brokerage account to generate more qualified dividend income. I’ll also work on slowly doing tax gain harvesting to gradually adjust my cost basis upwards. Might as well take advantage of it, before I decide to go back to full time work.
Thanks for the reply.2016-09-19 18:28, By: brkr12002, IP: [184.108.40.206]
L4: About to Start New 72(t)Regardless of your projected very low income taxes in the near future, a SEPP of 22 years is almost guaranteed to become mismatched to your needs at some point. If you go back to work and do not need the SEPP proceeds, the annualSEPP distributionis low enough not to cause much of an income tax problem.
And you have the one time switch to the RMD method available anytime if you want to reduce the payout. You would need outlandish gains in the IRA for the switch to actually increase your payout since this method normally produces about a 40% lower distribution than the fixed dollar methods.
Therefore, not needing the money is a minor issue, but ever having to bust the plan to take out more would produce a severe penalty if it happened in your 50s. You would owe roughly 15-20k in penalty plus interest for many years. This exposure is closely related to how much other assets you could tap to preserve the SEPP and of course what other events occur over the 22 years that would produce pressure on you to bust the plan. Employability after several years away from the workplace may or may not be a problem.2016-09-19 18:53, By: Alan S, IP: [220.127.116.11]
L5: About to Start New 72(t)Hi AlanS,
Thanks for the reply. Yes, I did factor into account inflation adding up for down the road using different scenarios of between 4-6% levels, just to be on the conservative side.
I will be doing some part time work nextsemester for the local college, but deferring all of the income into the retirement plans (it’s part time level pay). This should help against long term employability concerns as well.
As for the switch to the RMD method down the road, I’ll address that down the road depending on asset growth and income needs at that point in life.
To prevent from busting this plan later down the road, I can tap my roth ($200k currently) or sell stock in my brokerage ($350k currently) or I have another traditional ira ($40k). So any of these funds would be used rather than bust the plan.2016-09-19 19:30, By: brkr12002, IP: [18.104.22.168]
L6: About to Start New 72(t)Just wanted to post an update saying that my custodian, Ameritrade, does use code 2 (Early distribution, exception applies) in box 7 of my 1099-R. Tax form received today.
This seems to be a common question and apparently fewer custodians use code 2. So, just in case someone is searching the forums, hopefully this is useful for those concerned about the distribution coding.
Other than that, everything is going better than planned. Cheers.2017-02-03 03:19, By: brkr12002, IP: [22.214.171.124]
L6: About to Start New 72(t)The last account you should touch in most situations is your ROTH IRA. Actually, you might consider do ROTH CONVERSIONS of the other $ 40,000 IRA if you can do it in the 15% tax bracket. Ultimately, everything you distribute from a traditional IRA will be taxed, at 15% or 25%, so usually it makes sense to pay a minimal tax as early as possible so that all future income and growth is never taxed.
I would double check that your local college would include you in its group health insurance plan as a part-time employee. None of the colleges that my sister taught at as an adjunct professor provided group health insurance to her. Further, they might not continue to do so if in fact they do now. Finally, Health Insurance reform may change everything ubder the new administration. Be prepared for changes.2017-02-03 05:03, By: dlzallestaxes, IP: [126.96.36.199]