# Choosing Distribution Method

L1: Choosing Distribution MethodI’m looking at a 72t and trying to understand why I would choose one method over the other beyond ease of calculation/recalculation and payment size. I find the annutization and amortization play out about the same for me in terms of payout. Any pointers folks can provide on things to consider? I’ll likely be working withy a tax person but always like to understand everything *before* I “trust” their judgement.2010-07-21 18:14, By: Sylvia, IP: [97.119.135.58]

L2: Choosing Distribution MethodWhile there are three methods, most select the amortization method as it will always produce the highest distribution amount using the same interest rate and age. For additional pointers, check out our Planning Pointers page – it is a great place to start.2010-07-21 18:34, By: Gfw, IP: [24.148.10.164]

L3: Choosing Distribution MethodI just ran 72t calcs, on 2 different 72t calculators, and find the annuitization method resulted in the highest payout. (age 51 male2010-07-24 15:00, By: Dick, IP: [24.236.208.189]

L4: Choosing Distribution MethodIt always does.Correction: See corrected post below.2010-07-24 15:24, By: gfw, IP: [24.148.10.164]

L5: Choosing Distribution MethodGordon:Go back and read your 07-21-2010 post stating, correctly, that the Amortization method always gives the largest 72(t) distribution amount.Then correct your post of 2 hours ago to which I’m responding. It sounds like you are now stating that the annuitization method gives the largest payout.Jim2010-07-24 18:13, By: Jim, IP: [70.167.81.119]

L5: Choosing Distribution MethodJim… thanks for catching. The amortization (NOT the annuity)method, based on the same interest rate and age will always produce the highest distribution amount.2010-07-24 18:27, By: Gfw, IP: [24.148.10.164]

L2: Choosing Distribution MethodThe “Amortization Method” will give the greatest payout for a given amount in your SEPP Plan account. But the first calculation you need to do is to figure out how much money you will need from the SEPP Plan on an annual basis. Then plug in the amount of money you have into the calculator on this site to see where you stand relative to what that amount of money will generate annually. If the calculator indicates that you will generate more money than you need annually, then use the “Reverse Calculator” to determine how much money you need in the SEPP Plan to generate the needed annual amount. Transfer out of your SEPP Plan account the excess and put it into a new, “Non-SEPP Plan” account under a new account number and use this account for emergencies so you don’t “bust” the SEPP Plan.For example, assume you are age 50 with $500,000. The Aamortization method will generate $25,126.92 per year. However you only need $12,000 per year. The Rreverse Calculator tells you that you only need $239,988 in your SEPP Plan to generate the $12,000 distribution per year. So you simply transfer $260,012 into a new account for your “Emergency Fund.” Of course if you need to make withdrawals from this second account you will pay the 10% penalty in addition to the ordinary income taxes, but you don’t bust the SEPP Plan.

Jim2010-07-21 18:35, By: Jim, IP: [70.167.81.119]

L3: Choosing Distribution MethodOr you can set up a 2nd, and even a 3rd SEPP 72-T with the remaining funds if and when you need additional distributions, if that need will continue for at least 5 years or until 59 1/2 if later. If it is a one-time additional need, or for only a couple of years, thenyou would probably be better off not setting up subsequent plans, and just pay the 10% penalty when you take additional distributions.In addition, youshould decide for your FIRST CALENDAR YEAR whether you need a full annual distribution, or a prorated amount based upon the month of the first distribution. You might decide that it makes sense to take a fullyear’s distribution the first year to provide some cushion for the 2nd and followingyears so you might not need a future extra distribution, with its 10% penalty on top of the regular income tax.2010-07-21 19:46, By: dlzallestaxes, IP: [72.78.110.86]

L4: Choosing Distribution MethodIf you don’t need entire IRA balance for your SEPP plan and you follow Jim’s good advice and do the partial transfer before starting your plan, make sure you recalculate the amortization (or any other) payoutusing the new remaining $$ balance in the fund you plan to designate for your SEPP if it is not the same balanceyou had used in earlier calcs,and get aprintout of that day’s balance to keep for your SEPP records, then submit your figures for the plan to your custodian. With daily changes in fund balances, etc, even if you tried to leave that exact needed amount in a separate IRA, you would probably not hit the nail on the head, and you need to have proof for your calcs, including thatbalance being in your account on a date prior to the SEPP starting if your SEPP is challenged by IRS. Also remember that the maximum “reasonable interest rate” (as it is titled in the calculation formulas on this site referring to the 120% Fed Mid Term rate) that you can use changes depending on when first payment is being received, so any delay in starting can force you to recalculate with a new rate, if that rate has expired. They are explained in terms of what time period they cover, at top of the calculation page on this site as I recall. Final tip- avoidannualrecalculationif you use AMORT method. Stick with same figure for each full year.There are less moving parts. If you ever do one time switch to Minimum Distribution method, you will have to do annual recalcs, as I will be doing since I made the switch to lower my annual payments for last 2 years of my SEPP. KEN2010-07-21 22:05, By: Ken, IP: [71.192.120.143]