Calculating 72T payments

L1: Calculating 72T paymentsCan I base my 72T payout on an % of the value of my IRA rather than afixed dollar amount?in other words if the account is $250,000 now and I want 5%, I would get $12,500 this year.Next year if the account is worth $200,000, I would only recieve $10,000 the dollar amount would change but the % of the total account would remain the same.Is that allowable?2002-08-30 10:01, By: Patrick, IP: [127.0.0.1]
L2: Calculating 72T paymentsHello Patrick:The short answer is YES.The longer answer is that what you propose is called “annual recalculation” which requires that you still select one of the three methods; then recalculate as of the same date each year; updating all of the values each time; e.g. age, interest rate & account value.In this sense the 72(t)/SEPP amount is no longer “substantially equal” but the methodology is exactly equal applied consistently every year.TheBadgerwjstecker@wispertel.net2002-08-30 10:47, By: TheBadger, IP: [127.0.0.1]

L2: Calculating 72T paymentsThanks Badger,But I am still unclear on onme point.When I re-calculate, I assume, I upgrade info. on my age and account value and use the same method to calculate the payout, but wouldn’t I have to use tha same interesr rate throughout the life of the 72T account to be consistent?2002-08-30 11:45, By: Patrick, IP: [127.0.0.1]

L2: Calculating 72T paymentsActually, no. The IRS’s current stance is that when performing annual recalculation, in addition to all of the other variables, one must also select a “relative interest rate” (RIR) as opposed to a fixed interest rate. An RIR might be something like 120% of the mid-term or long-term applicable federal rate (AFR).These AFRs move around each month and are published in a variety of places.TheBadgerwjstecker@wispertel.net2002-08-30 12:18, By: TheBadger, IP: [127.0.0.1]

L2: Calculating 72T paymentsSo how do I determine my RIR? Must I use the AFR for the month I start the account?What limits are there on the multiple of the AFR I can use? (you ues 120% in your example, can I use 90%?, 150%?, 200%?Are ther other benchmarks for caclculating the RIR? As long as they are reasonable?2002-08-30 15:18, By: Patrick, IP: [127.0.0.1]

L2: Calculating 72T paymentsSo how do I determine my RIR? Must I use the AFR for the month I start the account?It depends. If it is a one-time computation you can use an RIR from the previous year-end (meaning really the January rate); or, if you are using annual recalculation, say as of 3/31/xx, you would typically use the April rate for the same year.What limits are there on the multiple of the AFR I can use? (you ues 120% in your example, can I use 90%?, 150%?, 200%?The interest rate test to reasonability is a “one-tail” upper limit test only; thus you can use as low a limit as you care to. The upper limit is generally limited to the higher of 120% of the mid-term or long-term applicable federal rate.Lately, the IRS has been dis-approving rates higher than these particularly in light of the serious IRA asset depletion that has been occurring over the last two years or so.Are ther other benchmarks for caclculating the RIR? As long as they are reasonable?Sure, the other typical rate quoted are the mid-term & long-term PBGC rates. However, just about everyone skips these as these are harder to find and interpret and they are always lower than the applicable federal rates published by the IRS.TheBadgerwjstecker@wispertel.net 2002-08-30 17:30, By: TheBadger, IP: [127.0.0.1]

L2: Calculating 72T paymentsBadger: In your response to Patrick you make the following comment…….”By: TheBadger Date: 8/30/2002 Subject: Calculating 72T payments So how do I determine my RIR? Must I use the AFR for the month I start the account?It depends. If it is a one-time computation you can use an RIR from the previous year-end (meaning really the January rate); or, if you are using annual recalculation, say as of 3/31/xx, you would typically use the April rate for the same year.”It was my impression that if I used the prior year-end balance for a non-recalculating SEPP beginning for instance on 12/01/02, that I would have to use the most current AFR – or essentially that one which typically is posted in 12/01/02. Am I interpreting your statement correctly in that I can also use the interest rate that was in effect on 1/1/02 since I’m using the ending account balance in effect on 12/31/01?The AFR on 1/1/02 is currently higher than the 9/01/02 currently in effect and I foresee that’ll likely drop further when I project my SEPP to start on 12/01/02.Thx..endgame2002-08-30 23:10, By: endgame, IP: [127.0.0.1]

L2: Calculating 72T paymentsEndgame:I am afraid I may have mislead you a bit in my prior post with some assumptions I made which may not be true. The essence of an interest selection (for one-time computations) is that the “interest rate selected is not unreasonable at the time payments commence”. This is not necessarily the same as the IRA valuation date but often is the same. So alot of picking an interest rate depends on the particulars of your designed SEPP plan. Some examples:1. You use 12/31/01 balances and plan to commence monthly SEPP distributions commencing in Jan 2002; therefore you would use a Jan 2002 AFR.2. You use 12/31/01 balances and plan to commence one distribution per year but you haven’t yet decided when that one distribution will be made. You could use the Jan 2002 AFR or you could use the July 2002 AFR because you actually make the distribution in July 2002.3. You use 6/30/02 balances and plan to make quarterly distributions for the balance of 2002. It would be inappropriate to backup and use a Jan 2002 AFR!!! Rather, it would be appropriate to use a July/Aug/Sept AFR.Hopefully this makes a little better sense.TheBadgerwjstecker@wispertel.net2002-08-31 09:31, By: TheBadger, IP: [127.0.0.1]

L2: Calculating 72T paymentsThanks Badger….it helped significantly but just to make sure that I’m on the right track. In your points 1,2 & 3 am I to correctly understand that for instance if I started a SEPP (non-recalculable) on 12/1/02 (using the 12/31/01 account balance)I could use the 1/01/02 or the 12/1/02 AFR? Your underlying logic is that it all depends on which starting balance one uses to determine which AFR is reasonable and using a 6/1/02 starting account balance and applying a previous AFR would therefore be unreasonable. I guess the “one distribution per year” phrase also throws me a bit here too in that if I started the SEPP in 10/01/02 then “stub year” proration through 12/31/02 wouldn’t necessarily equate to a “one distribution” scenario (I would plan to receive 3 monthly payouts for the remainder of ’02, and would continue monthly payouts through the rest of the SEPP’s duration). Probably making this more complicated that it needs to be!Thx once again…..endgame2002-08-31 11:28, By: endgame, IP: [127.0.0.1]

L2: Calculating 72T paymentsBadger, It’s Patrick again.Say I want to re-calculate every year using the Amoritazation or Annuatization method. I must continue to use the same method, got that.I start Oct 1. Use my prsent age, balance as of Sept 1 and my RIR is determined as 120% of the AFR (long Term Rate) as of Sept 02.My RIR would be AFR(5.23%) X 120% = 6.27% for the first year.When I re-calculate in year two must all the above remain constant.In other words, must I alway use 120% of the Sept AFR-Long Term rate.This would seem to actually add risk, i.e; if interest rates go up I could find myself drawing a higher rate than I wanted.Although the method remains constant, can any of the factors in the equation used to determine my RIR be changed?For example: Year two the long term AFR for Sept is 6.5% so I then use a multiple of 96.5% of the AFR to keep my RIR a (Substantially) constant 6.27% of Sep. balance.Thanks for you patience. I’m getting there.2002-09-03 07:31, By: Patrick, IP: [127.0.0.1]

L2: Calculating 72T paymentsIf you start out using 120%, then you would continue to use the 120% rate. Note for September, the rate is 6.29%, not 6.27%. The 120% rate is a published rate.In reality, if you are going to do a annual recalculation based on then current assets, you should also use the then current 120%AFR for the month in which the annual recalculation occurs and your adjusted life expectancy as of the recalculation date.2002-09-03 08:02, By: Gfw, IP: [127.0.0.1]