interest rate

L1: interest rateWhat is the purpose of the interest rate in the calculations? 2005-10-08 10:29, By: billyboy, IP: [66.212.116.34]
L2: interest rateThe interest rate is used for the annuity and amortization methods. I functions just like the interest rate on a fixed-rate mortgage. If you have a mortgage with a low interest arte, the payment is lower. For payments under a 72t plan, the higher the rate the higher the possible payment.2005-10-08 11:48, By: Gfw, IP: [172.16.1.70]

L2: interest rateSo if I understand you correctly, it is used soley to determine the amount that will be paid for the annuity or amortization methods. Can it change over the course of the 72T period?2005-10-08 21:35, By: billyboy, IP: [67.166.236.234]

L2: interest rateIt is typically set when the plan is initiated and remains constant for the life of the plan. The interest rate that may be used is any interest rate that is not more than 120 percent of the federal mid-term rate for either of the two months immediately preceding the month in which the distribution begins.
The only exception is if annual recalculation is used where all assumoptions (including interest) may change (higher or lower)on an annual basis. 2005-10-09 12:28, By: Gfw, IP: [172.16.1.70]

L2: interest rateHi Billyboy:
The really important thing about what interest rate you use is not to pull a rate out of, well, thin air. Like Gfw stated, it’s no more that 120% of either of the two previous months’ Federal Mid-term Rate. So if youtake your first distribution in October, 2005, you may use either August or September, 2005 rates for your calculations. The rates are posted on this site for your convenience.
Don’t make the mistake of assuming something like 10% to be “reasonable” because that rate will far exceed the allowable rate. Recent posts on this subject have shown some banks and other institutions don’t have a clue about how to do this right and have caused disasterous problems for people.
Good luck.
Jim2005-10-10 10:51, By: Jim, IP: [70.184.1.35]

L2: interest rateSo if I start my withdrawal in November I can use 3.80% in my calculation?2005-10-14 20:55, By: Don, IP: [69.251.152.161]

L2: interest rate
Here is the IRS website that details the “120% of Federal Mid-Term Rate” and issues a new rate a couple weeks before each new month.
http://www.irs.gov/taxpros/lists/0,,id=98042,00.html
You can use the rate of the month of distribution or the rates of the previous two months.
The rates are different depending on how you plan to take the money…annually, quarterly, monthly, etc.
This is November 2005’s rates:
Mid-term Annual Semi Qtly Mtly
120% AFR 5.09% 5.03% 5.00% 4.98%
Assuming you take your first distribution in November you can use any of the following rates (I used MONTHLY rates for this hypothetical)…
November4.95%
October 4.40%
September 4.93%
If needing the MOST dollars as an income stream, I would use the 4.95%.
American Funds website has a great and reliable calculator.
https://www2.americanfunds.com/servlet/ContentServer?pagename=afweb/broker/external/72tCalculator&primNav=RetirementPlans&secNav=Calculators&userType=broker
You will find different vendors use slightly different calculators and get slightly different results.
Print and keep copies of the calculation(s) you find, especially the one you use to start distributions.
Always get your CPA, Tax Attorney, and/or Financial Advisor/Planner to verify the numbers and interest rates.
Documentation and research and reliable expert advice is KEY.
BamaAdvisor2005-11-10 12:46, By: BamaAdvisor, IP: [216.248.170.201]

L2: interest rate
PS
If you have a large IRA and don’t need all the income a 72(t) calculation shows…divide the IRA into TWO and recalculate the 72(t) on one of them and save the NON-72(t) IRA dollars from being committed to 72(t) and dooming yourself to distributions of more taxable income than you need and keeping important dollars safe and growing tax deferred.2005-11-10 12:49, By: BamaAdvisor, IP: [216.248.170.201]

L2: interest rateBamaAdvisor – something must have changed – Rev. Rul. 2002-62 states nothing about using the current month”s interest rate and is quite clear about what rates are available.
Could you provide us a reference to the IRS publication or ruling that allows theuse of the current months rates.
In terms of our calculators, review the following article http://72t.net/ArticleShow.aspx?WA=44and it wil give you soe idea as to the accuracy of our calculators. I haven”t updated the article, but the biggest variance is 1 cent from the IRS examples – where do the calculators that you recommend end up wit the numbers in teh IRS example? 2005-11-10 15:31, By: Gfw, IP: [172.16.1.73]

L2: interest rateI’m hangin’ with the rules but I’m still slightly confused by the language on the actual calculator. 1) Is Reasonable Interest Rate intended to be 120% of midterm? If so, why does today’s show 5.09? If not, what does it mean? 2)What does Actual Investment Rate mean? and 3)What is the IRS Penalty Interest Rate?
Thanks2005-12-01 15:23, By: rat, IP: [71.133.238.166]

L2: interest rateTo – rat – spend a little time reading some of the materials on the site and all of your questions will be answered.
1) Look on the Interest Rate page at http://72t.net/InterestRates/RatesFor72t.aspx
2) Look in the help file [Help Button] on the Calculator Page. 3) Look in the help file [Help Button] on the Calculator Page. 2005-12-01 15:32, By: Gfw, IP: [172.16.1.71]

L2: interest rategfw: duh. i also realized that the website hasn’t been updated yet for december. didn’t think to use help as a glossary of terms. thanks.2005-12-01 15:46, By: rat, IP: [71.133.238.166]

L2: interest rateThe site has been updated for December.
However, for a plan starting in December, 5.09% is the maximum rate (higher of 5.09% for Nov and 4.91% for Oct).
For a plan starting in January, the max rate would be 5.43%. 2005-12-01 15:54, By: Gfw, IP: [172.16.1.71]