Changes to 72t distributions
L1: Changes to 72t distributionsI have been receiving annuitized distributions from my IRA since age 51. After reaching age 60 my financial advisorreduced the amount of the distribution. I would like to change it again, is this permitted? I want to reduce it by rolling most of the assets held in the account into an annuity. The annuity will pay less than the current distribution. The reason for doing this is that the IRA trustee is selling off my assets in order to provide therequired distribution. Soon there won’t be any left and I won’t be receiving any more distributions. If I roll all the liquid assets intoan immediateannuity I won’t run out of money before I die. Can I do this?
2010-10-09 23:40, By: Joan, IP: [188.8.131.52]
L2: Changes to 72t distributionsYes, you can do this. Once you passed 59 1/2, there is no “required minimum distribution”. Maybe the “required distribution” is one that you have imposed by asking them for $xxx per month.
BUT, you obviously do not understand what your broker is doing. Let me try to explain.
1. He is probably not selling off ALL of your investments. Only enough to make up the shortfall of cash flow for your needs/requests.
2. You are under the common misunderstanding that there is something wrong in selling investments to create cash flow.
4. If your investments are, or were, in fixed-interest securities, like CDS, bonds, etc, and sincethe interest rates have declined significantly because of the economy, so as they matured, you can only invest in lower interest producing ones, then he has no choice but to sell something to generate the cash for the distributions you are requesting. While interest rates were high, this was probably not a problem in the past.
5. If your investments are growth securities, i.e. common stocks or mutual funds, then he is selling some because the dividends create less income than your cash requests. BUT, if these investmenst are appreciating in value, he is prudently taking some of the gains, and using that to supplement the cash from the dividend income. This is a perfectly valid and sensible approach.
6. If you do not understand this, then you probably should not be investing in stocks and mutual funds, but millions of others do.
7. When you reach 62, or 60 as a widow, you could start to get Social Security benefits ( 75% of the amount ypou would get if you waited until 66.
8. Let me clarify # 5 — If you have $ 500,000 in stocks/mutual funds, and it is earning 2% ( $ 10,000) a year, and you WANT $ 40,000 a year, then the other $ 30,000 has to come from somewhere. However, if the investments are growing at 6% a year, then your portfolio in your IRA will grow from $ 500,000 to $ 540,000 based upon the $ 10,000 in dividends plus $ 30,000 in appreciation. So, when you take out your $ 40,000, the IRA trustee has only $ 10,000 in cash from the dividends, assuming they are not being reinvested. So he has to sell $ 30,000 worth of one or more investments to generate the extra cash you want. After he makes the distribution of $ 40,000 in cash, you still have $ 500,000. If the investments had appreciated, only $ 20,000 (4%), then your portfolio would decline by $ 10,000 to $ 490,000. If, on the other hand, they had increased $ 50,000 ( 10%), then your portfolio would have grown by $ 20,000 to $ 520,000.
9. Simillarly, if you had fixed-interest investments, he would have to sell something, or not re-invest a matured investment, if the cash to be distributed was greater than the cash income from interest or preferred dividends.2010-10-10 01:04, By: dlzallestaxes, IP: [184.108.40.206]
L3: Changes to 72t distributionsThank you for the thoughtful and time consuming response to my question about changing the distributions from my IRA. I realize there is not an RMD until I reach age 70 1/2 however my advisor told me when I started taking early distributions before age 59 1/2 that they would have to be equal payments under Rev. Rule 72t. Laterat age 60,we changed the amount of the distributions at which time my advisor said that I could only make the change once. I am 69 now.
Here’s what I found on the IRS website: Rev. Ruling 2002-62 states that “Once an annual distribution amount is calculated under this fixed method, the same dollar amount must be distributed under this method in subsequent years.” And Pub 590 (2009) has this to say about a One-time switch. “If you are receiving a series of substantially equal periodic payments, you can make a one-time switch to the required minimum distribution method at any time with incurring the additional tax. Once that change is made you must follow the required minimum distribution method in all subsequent years.
With the required minimum distribution method the account balance, the number from the chosen life expectancy table and the resulting annual payments are redetermined for each year. Which I interepret to me that under this method I could change the amount of the distribution.
So my question is, does the change I made at age 60 constitute a switch to the minimum distribution method? I would like to assume that it did, since that would give me the freedom to roll my assets into an annuity, even though it would mean receivng less than was determined under the previous method.
My concern is that I have not been redetermining the amount every year as specified. Does that fact disqualify the change?2010-10-10 22:16, By: Joan, IP: [220.127.116.11]
L4: Changes to 72t distributionsThe concept of the effect of your 72t plan modification date is the problem here, and it is totally misunderstood. Your 72t plan ended when you reached age 59.5. After that date you are free to distribute any amount you wish, or nothing.
The RMD method referenced in Notice 2002-62 only refers to an option to use during the tenure of your 72t plan, but there is NO obligation to continue anything after the modification date, which is age 59.5 in your case. I hope you did not take out distributions after that date that you did not need because you did not have to take any distributions at all unless you wanted to. In short, there is nothing you can do wrong between age 59.5 and 70.5 that causes any form of penalty. The only problem is that if you have continued these distributions you have paid taxes sooner than you needed to if you did not need the money you took out.
Of course, your actual RMDs begin in the year you reach 70.5 or the required beginning date in the following year. If you took out money you did not need to, you can take some comfort knowing that your actual RMDs will now be smaller than they would have been.
Unless you advisor is referring to some restriction in the investment product you are in, he has made a very expensive error, and it smacks of someone who knows nothing about 72t plans. In fact, this is the first post I can recall where someone was told they must continue a 72t plan beyond the modification date clearly spelled out in 2002-62.You may have want to talk to an attorney about this if you did not need the money he advised you to distribute after you reached 59.5! In addition, I hope that the actual investments he is recommending are better than his knowledge of 72t plans. This is probably the case for many advisors, ie they may be OK with the investment recommendations but not at all up to speed on 72t plans.
2010-10-11 03:28, By: Alan S., IP: [18.104.22.168]
L5: Changes to 72t distributionsI do not allow incompetents like this to continue to mislead the public. I would DEMAND a meeting with the top person in their office. DEMAND that the advisor provide documentation of his position, and that the manager sign off that this is the company’s position also. Also, DEMAND that this go into his personnel files. and DEMAND that you be compensated for any increased taxes if these distributions elevated you into a higher tax bracket. THEN, change advisors to someone who knows what they are doing, and will not mislead you about anyhthing that he does not understand, or does not realize that he does not understand.
All DEMANDS should be in writing.2010-10-11 05:01, By: dlzallestaxes, IP: [22.214.171.124]
L6: Changes to 72t distributionsThank you for confirming what I guessed about my advisor’s knowledge of 72t distributions. I blame myself for not looking into this earlier. Thank you for the service you performing in helping to educate people like me.
On the second topic. I appreciate your explanation of what happens to investments in stock and mutual funds when the amounts withdrawn exceed the appreciation and dividends. I believe that is what is happening in my case. Perhaps you will be kind enoughto tellme how I can verify that conclusion. Right now I am judging by the fact that my shares are steadily decreasing and with that, (and the economy)the dollar value of my portfolio. Is this an inappropriate measure?2010-10-11 20:33, By: Joan, IP: [126.96.36.199]
L7: Changes to 72t distributionsHere is the easiest way to monitor your situation :
– Distributions to you year-to-date (ytd)
– Federal ( and state) income taxes withheld (ytd)
= Net (ytd)
+ Interest/Dividend Income (ytd)
+ Capital Gains Dividends (ytd)
= Projected Total Balance (ytd)
Actual Balance ( as of date analysis is thru)
– Projected Total Balance (ytd)
= Increase ( or Decrease) in VALUE
You can also look at Interest/Dividend Income – Distributions/Taxes Withheld. If this is a + figure, then you withdrew less than you earned, and that should have resulted in an increase in your balance, even if the values did not change. But then, if you withdrew more than you earned, you still could be ok if the excess withdrawals were less than the Increase in the Values, because then your Total Balance would have increased because of, or despite, the items listed above.2010-10-12 00:09, By: dlzallestaxes, IP: [188.8.131.52]
L8: Changes to 72t distributionsThank you dlzallestaxes, ror the formula for evaluating my portfolio. I appreciate it.2010-10-13 00:13, By: Joan, IP: [184.108.40.206]
L5: Changes to 72t distributionsThank you for the very helpful information. I suspected that the rules I quoted regarding the 72t distributions only applied until age 59.5 but I couldn’t find anything in the law that actually said that. They just referred to all subsequent years.
The question now is, that since I am 69 and want to roll my IRA investments into an annuity now, will I have a problem when when I turn 70.5. If I use most of the assets in the IRA to purchase an annuity now and the annuity payments are less than the RMD, will I penalized on the distributions after age 70.5?2010-10-11 20:24, By: Joan, IP: [220.127.116.11]
L6: Changes to 72t distributionsThe penalty for distributing less than the RMD ( Required Minimum Distribution) is 50% of the shortage !!!
Therefore, determine your RMD ( it starts at about 4% at 70 1/2 thru 75), and make sure that you have some uninvested cash to supplement the distributions to avoid any shortage.2010-10-11 21:05, By: dlzallestaxes, IP: [18.104.22.168]
L7: Changes to 72t distributionsI believe that if you are purchasing an immediate annuity payable over your remaining life that the annuity stands by itself and will meet the RMD requirements.
Please understand, this is not an endorsement for the annuity – In most situations you can probably do better without much effort. 2010-10-11 21:28, By: Gfw, IP: [22.214.171.124]
L8: Changes to 72t distributionsI think you may be right. I remember reading something about the amount from an annuity meeting the RMD requirements. Unfortunately I can’t find it to be sure I remember it correctly. I am thinking about asking a tax attorney.2010-10-12 00:01, By: Joan, IP: [126.96.36.199]
L9: Changes to 72t distributionsI doubt that there would be any definite relationship between the annual distributions from an annuity, and the Required Minimum Distributions per the IRS Tax Code. Remember, you decide on the annuity product, income, and years, whichmay haveno relationship to the tax code.
Even more importantly, in a SEPP 72-t ( which is not your situation), the distributions in the first ( and last) calendar year have flexibility unrelated to the annuity income/cash flow.2010-10-12 00:16, By: dlzallestaxes, IP: [188.8.131.52]
L10: Changes to 72t distributionsgfw is correct. If you purchase an immediate annuity or annuitize an existing IRA annuity, the annuity payout will BE the RMD for the annuity IRA unless the issuer structures it incorrectly. Any other IRAs must distribute their own RMD in the usual fashion. Since there is no longer any account balance after annuitization of the annuity, this is the only possible conclusion. That said, in the initial year there IS a prior year end account balance so the annuity payment can be aggregated with the RMD for the other IRA accounts. This is explained in more detail inthe following article by Natalie Choate, one of the nation’s top IRA experts:
http://www.morningstaradvisor.com/articles/article.asp?docId=158632010-10-12 02:20, By: Alan S., IP: [184.108.40.206]
L11: Changes to 72t distributionsDear Alan S.
Thank you for your post. The explanation is great and the article by Natalie Choate is excellent. Thank you for telling me about it.I ordered her book on the subject. If I understandher articlecorrectly, and here the book may further clarify, I will need to treat the the Annuity and the remaining assets in my IRA as two separate IRAs for RMD purposes. It will also help me decide whether to buy an annuity “inside” or “outside” the IRA.
I followed through on asking an online tax attorney whether the distributions from an annuity would satisfy the RMD. His answer was that if the annuity is not spinning off enough from the regular payments to meet the RMD that I would be penalized for the amount retained in the IRA that is less than the RMD. When I referrerd him to Natalie Choate’s articlehe advised that I rely on her advice (rather than his) since she is the recognized expert on IRAs.
Joan2010-10-13 00:34, By: Joan, IP: [220.127.116.11]
L10: Changes to 72t distributionsFor an IRC reference to the annuity rules and RMDs look to:FINAL REGULATIONS 1.401(a)(9)-6. Required minimum distributions for defined benefit plans and annuity contracts.
They can be found at http://www.irs.gov/pub/irs-tege/reg401a9_6.pdf
A lot of reading and mostly deals with Defined Benefit plans. Q-12 also deals with annuity contracts under an individual account plan…
Q-12. In the case of an annuity contract under an individual account plan that has not yet been annuitized, how is section 401(a)(9) satisfied with respect to the employee’s or beneficiary’s entire interest under the annuity contract for the period prior to the date annuity payments so commence?2010-10-12 10:22, By: Gfw, IP: [18.104.22.168]
L11: Changes to 72t distributionsThanks GFW for the IRS citations. I had already read most of it but didn’t notice Q-12. thanks for directing me to it.2010-10-13 00:36, By: Joan, IP: [22.214.171.124]
L12: Changes to 72t distributionsJoan:
Understanding the difference between two separateterms will helpwith your delima. These terms are “annuity” and “deferred annuity.” These two terms are generally lumped into the single term “annuity” which creates the confussion.
“Annuity” in the pure definition means a stream of payments lasting for your lifetime and then stopping. ALL annuities are issued by Life Insurance companies and receive their funding from various sources. A company’s Defined Benefit Plan or pension is created when the employee retires and the company purchases a “Single Premium, Immediate Annuity (SPIA)” from an insurance company thatmakes the payments to the retiree. An individual may purchase a SPIA with personal funds from either their IRA, 401(k) for a “Qualified SPIA,” or use “after-tax funds” to purchase a “Non-qualified SPIA.” In certain instances the SPIA is designed to payout for a period less than lifetime and with guarantees to last for a period of years to a designated beneficiary if the person, called the annuitant, dies before collecting payments for the designated number of years. In the case of the “Qualified SPIA” set up for a “lifetime” payout or an “annuitized deferred annuity,” like Alan mentioned, the only value to the annuitant is the stream of payments and RMD rules don’t apply.
“Deferred Annuity,” both variable and fixed, are not “annuities” in the sense of the above difinition since the “stream of payments” hasn’t been started but is “deferred.” Deferred Annuities can be the “funding vehicle” for both Qualified and Non-qualified types of funds. If you fund a SEPP Plan IRA, for example, with a deferredannuity, then you have to follow the rules for running a successful SEPP Plan. If you still have a deferred annuity funding your IRA when your “Required Beginning Date (RBD) arrives, then you have to follow the RMD rules. RBD is “April 1st of the year AFTER you turn 70 1/2.” If you “annuitize a deferred annuity” then RMD rules are satisfied.
Now a word about using deferred annuities to fund IRA’s. I know I will get hammered for my position but that’s OK. Deferred annuities offer features, classified as “Living Benefits” and “Death Benefits,”that other investments like mutual funds and managed accounts don’t offer BECAUSEdeferred annuitiesaresponsored by life insurance companies. Before using a deferred annuity to fund your IRA, consider whether these benefits may benefit you or not. If the answer is “NO” then use something else to fund your IRA. But if either or both of the death benefit or living benefit appeals to you, then seriously consider using a deferred annuity to fund your IRA. There are additional costs to evaluate when considering this approach. Some argue that the death benefit is too expensive and you should simply buy life insurance and invest in non-deferred annuities. But the delima is that you may be un-insurable for a new life policy so this is no option. Many purchasers of deferred annuities are elderly men, with a “life only” company pension, drawing Social Security,in bad health, and theirIRA is the largest asset in the family. If their funds are invested in a mutual fund and the market tanks and he dies, then the surviving spouse has a much smaller account value towork with. Thepension stops andSocial Security reduces soa significantamount of monthly income terminates. Personally I have had four cases like this when the market crunched in 2000. The widows were all very happy that their husband’sIRA funds were invested in a deferred variable annuity, and they received the “stepped-up death benefit” which was significantly higher than the acutual market value of the deferred annuity. So consider your options when selecting a funding vehicle and don’t accept the often touted position that you “should never invest in annuities.”
Jim2010-10-13 14:05, By: Jim, IP: [126.96.36.199]
L13: Changes to 72t distributionsThanks for an excellent description/clarification of annuities.
Re SS benefits a clarification If the spouse (wife usuallly) is collecting 1/2 of the husband’s benefit, then upon HIS death, she will get his full benefit that he was receiving, and her 1/2 benefit would stop. Of course, if she was collecting more on her own work history than 1/2 of his benefit, then she could get his still in place of hers if his was higher.2010-10-13 16:15, By: dlzallestaxes, IP: [188.8.131.52]
L14: Changes to 72t distributionsDavid:
Thanks for the clarification on SS reduction.
Jim2010-10-13 18:10, By: Jim, IP: [184.108.40.206]
L14: Changes to 72t distributionsDlz… Just a follow-up on your SS post. Something that I learned about Social Security…
Husband age 65 retired and receiving SS benefit of $2,000/mo. Wife has full work history and has a benefit of $1,500/mo in her own right at payable are age 65.
Planning ahead… Wife takes 50% of husband’s benefit of $1,000 at age 65 (instead of her own benefit). At age 70 wife can apply for and receive her full benefit (increased because of late retirement) and stop receiving 50% of husbands benefit.
It only fits a few situations, but when I asked a SS planner about it, she said that yes, you can do exactly that to maximize both benefits.2010-10-13 20:22, By: Gfw, IP: [220.127.116.11]
L15: Changes to 72t distributionsSocial Security/Retirement planning is an interesting specialty by itself. Yes, there are ways to collect on each other’s work history, and other special situations involving widows, divorce, disability, and waiting until 70 to receive a 32% increase in benefits for your life and your surviving spouse’s.
A few years ago I had to contact the SSA Director in Baltimore to inform her that her reps were mis-informing taxpayers in widow situations where they have a choice in the approach to use. She thanked me to bringing the training problem to her attention. “Back in the day”, I was the one responsible for SSA expanding the SS History of Earnings report to the full detailed list. Before that, we got a postcard-sized report with the most recent 5 years in detail, and then “all previous”. After they started the new report, I convionvced them to show the totals of the taxes paid in, to confirm that the taxpayer received his back within 30-36 months.
SSA has superb personnel who work with you to develop the best approach, and their website has greta explanations of everything. Also, fantastic booklets on all of these areas.
A company called QUICKFINDER started a new publication last yearcalled “SOCIAL SECURITY & MEDICARE HANDBOOK”, which I use as a reference, as do many other practitioners.2010-10-13 20:35, By: dlzallestaxes, IP: [18.104.22.168]