IRA can’t cover 72t distribution
L1: IRA can’t cover 72t distribution
These are a couple of “what if” sort of questions. I am very curious to know the answers to these questions, none-the-less.
Lets say that after a 72T distribution has been calculated and started, the value of the IRA drops so significantly that the next distribution cannot be made, what happens?
Lets say a self directed IRA has hard assets that are illiquid, and a time comes when the minimum distributions must be taken, or even the above scenario plays out, but the assets cannot be liquidated, what happens?
2012-01-19 21:24, By: dead ringer, IP: [220.127.116.11]
L2: IRA can’t cover 72t distribution1. If the “value” of an IRA is less than the RMD or SEPP 72-T distribution, it can be liquidated or transferred to the taxpayer, and the account closed. IRS cannot get “blood from a stone” (contrary to some taxpayers’ thinking). You are not required to
distribute more than the value of the account. 2. Distributions do not have to be made in CASH. They can be made”in kind” by distributing shares of the securities. 3. Anyone who puts illiquid assets into an IRA, especially a SEPP 72-T, is potentially looking
for problems. 4. Some “advisors” have clients in Self-Directed IRAs investing in real estate. I have a long list of why real estate, other than land, does not make sense in an IRA. Similarly with IRAs invested in related businesses.2012-01-19 21:41, By: Dlzallestaxes, IP: [18.104.22.168]
L3: IRA can’t cover 72t distribution
Thanks for the fast and informative reply.
I would be very interested to read the “long list” of reasons why Non raw land real estate isn’t wise. I would like to understand why raw land is a better choice too.
2012-01-19 21:47, By: dead ringer, IP: [22.214.171.124]
L4: IRA can’t cover 72t distribution
1. All deductions, including depreciation, are useless in an IRA, while they reduce taxable income for the same investment in a non-retirement account.
2. All investments, including real estate, are usually bought because you expect them to go up in value. All distributions from IRAs/retirement accounts are taxed as ordinary income, usually at 25%-35%. Long-term capital gains are taxed at 15% (under current
tax law). I think it makes sense to save 10%-20% in taxes on the gains.
3. Losses on real estate are deductible on personal tax returns (subject to passive loss limitations, but can be carried forward). There are no tax benefits to losses within a retirement account.
4. Raw land does not have depreciation, and has fewer deductible expenses then buildings. But it has the same capital gain/loss aspects as in # 2 and # 3 above.
By the way, # 2 and # 3 are also reasons/arguments for investing in stocks/equity mutual funds in non-retirement accounts, if possible, as far as part of your “allocation/balancing/diversification” planning. Unless you are a short-term investor/trader. Also,
qualified dividends have tax rates of 15% in non-retirement accounts, but ultimately 25%-35% in IRA/retirement accounts. Of course, ROTH IRA investments are basically never taxed on income (interest or dividend) or realized gains.
2012-01-19 22:10, By: dlzallestaxes, IP: [126.96.36.199]
L5: IRA can’t cover 72t distribution
2012-01-19 22:19, By: Jim F, IP: [188.8.131.52]
L6: IRA can’t cover 72t distribution
If all assets in all 72t plan IRAs are fully distributed, the 72t plan simply ends without penalty. If there are other retirement assets available at the time, an entirely new plan could be started.
Illiquidity is another issue altogether. IRA custodians have a duty to determine the value of IRA assets, although the IRS has notprovided specific approved methods other than appraisal when it comes to real estate. Distributions
in shares or units must still be valued by the IRA custodian for 1099R purposes. Since most people execute 72t plans to access funds for living expenses, it would be unlikely many such people would want to purchase real estate because even if shares
were distributed, they are still illiquid in many cases. There is always a risk of unexpected expenses associated with improved real estate, such as repairs not covered by insurance, pollution problems, legal disputes with tenants etc. Therefore it would not
be wise to invest a 72t plan in such assets as it increases the risk of busting the plan or running short of liquid assets to live on.
2012-01-19 22:35, By: Alan S., IP: [184.108.40.206]
L7: IRA can’t cover 72t distribution
“IRA custodians have a duty to determine the value of IRA assets…
Distributions in shares or units must still be valued by the IRA custodian for 1099R purposes.”
So, by my understanding of the above statement, the custodian of the IRA has some real duty to determine the value of an assetbefore a 72T plan is put into place. Am I wrong?
In the context of this discussion, how would busting of the plan take place, and what would the penalties be, and to whom?
2012-01-20 01:07, By: dead ringer, IP: [220.127.116.11]
L8: IRA can’t cover 72t distributionAll SEPP 72-T IRA accounts must be valued for determining the total to be used in the calculation of the ANNUAL DISTRIBUTION. The IRS requires only that the valuation must be at a reasonable amount/date in relationship to the first distribution. In “normal”
situations that can be maybe 6 months before as of the preceding 12/31. In any context, busting occurs by taking more or less than the annual distribution. The IRS penalty is 10% of the cumulative distributions, plus interest. The penalty for the person who
sold someone an “inappropriate investment” could be loss of his professional license.2012-01-20 02:50, By: dlzallestaxes, IP: [18.104.22.168]
L9: IRA can’t cover 72t distribution
So, would the custodian, or would the owner of the IRA, be responsible for assessing the value of, say, a piece of income producing real estate prior to a 72T determination. If this property were held for several years prior in the ira, would/should it’s
value be assesed, maybe yearly, or maybe not be assesed at all until a distribution is requested or required? It could get crazy if a 72T distribution were determined using the original value of a property in a down market. Scary stuff.
2012-01-20 03:21, By: dead ringer, IP: [22.214.171.124]
L10: IRA can’t cover 72t distribution
I just thought too… How would property taxes get paid? By the owner, or the custodian from funds within the IRA. If the owner pays the taxes, would they be deductible? And what about management fees and stuff like that? The fees of the custodian, and the
fees of a property manager?
I’m taking this off topic, my apologies. I find it all interesting anyway.
2012-01-20 03:32, By: dead ringer, IP: [126.96.36.199]
L11: IRA can’t cover 72t distributionThe “owner” has to be the IRA. The IRA has to pay all expenses of the property, which includes real estate taxes (because the deed has to be in the name of the IRA), and all operating expenses. Of course, the IRA would only have the net income after expenses
to distribute in cash. If the taxpayer paid any of these, he is in big trouble, and in even more trouble if he deducted the real estate taxes on his tax return. How do you spell FRAUD !!!2012-01-20 04:55, By: dlzallestaxes, IP: [188.8.131.52]
L10: IRA can’t cover 72t distributionThe custodian has no responsibility for the valuation. It is the taxpayer’s responsibility, as well as the calculations and documentation. The value at any time prior to the selected valuation date is immaterial. For example, instead of real estate, let’s
assume that it was an investment in Lehman, GM,Ford, etc. 10 years ago, and the SEPP was set up 6 months before their collapses. The “initial SEPP valuation” would have declined drastically, and would be unable to distribute the required amounts. How about
telling us the reason, and facts, in your scenario, instead of beating around the bush.2012-01-20 03:35, By: dlzallestaxes, IP: [184.108.40.206]
L3: IRA can’t cover 72t distributionI have a very specific question on making changes to 72T that has to do with REIT’s Realestate Investment Trusts. What happens when a REIT drops the dividend distribtion from 5.25% to ZERO and 72t Distribtions had been coming from the REIT?
This is a non publically traded so therefore cannot be liquidated. So statements will still show a value but you cannot sell any shares.
There is another IRA but that IRA which was started at the same time as the one with the REIT is in a seperate IRA. Terms and calculations would be the same on both IRA’s they were just seperated. And both IRA’s were taking 72T.
Has there been any IRS publication that tells us what to do with an illiquid investment?2012-03-26 21:44, By: Mucka555, IP: [220.127.116.11]
L4: IRA can’t cover 72t distributionPresumably a taxpayer would not start a 72t plan using an IRA holding only potentially illiquid investments, but of course this might happen unwittingly. Even though the plan could be satisfied by the in kind distribution of shares, there would be a small amount of cash needed if fractional shares could not be distributed to meet the exact 72t required amount. That would satisfy the plan, but would not provide anything for living expenses.
The “other IRA” as part of a 72t plan could only be used to satisfy the requirement if there is ONE plan using the balance of both IRAs. If these were set up to be two independent 72t plans, distributions from one cannot be used to meet the requirements of the other. But one of the benefits of having independent plans is that if one is busted it does not affect the other. In that situation it would be beneficial to bust the smaller plan should that be the best remaining solution.
I know of no IRS letter ruling or Noticeson this situation and almost nothing about 72t plan details are included in actual IRS Pubs. There isrelief on IRAs that become worthless, but nothing on liquidity problems.
2012-03-26 22:10, By: Alan S, IP: [18.104.22.168]
L4: IRA can’t cover 72t distributionMucka555…
Question… Is there some kind of cash account associated with the REIT Ira? To hold amounts below the dividend or to pay required amounts in addition to the dividend.
It would be rather strange that the annual 5.25% dividend would exactly match the calculated annual distribution.2012-03-26 22:33, By: Gfw, IP: [22.214.171.124]
L5: IRA can’t cover 72t distributionMucka555 :
Please answer the question — Did you set up ONE SEPP 72-T plan funded by 2 separate IRA accounts, or did you set up TWO SEPP 72-T accounts each funded with only ONE of the IRA accounts for each plan ?2012-03-27 04:46, By: dlzallestaxes, IP: [126.96.36.199]