New 72t – Questions regarding setting up the 72t
L1: New 72t – Questions regarding setting up the 72tI am a 54 year old female (July 1960), and am working full-time. My husband is unemployed and will likely not be able to get another job with a comparable salary. I have approx 1.5 million in IRA money (from my former employment) and would like to set up a 72t beginning Jan 2015.I am looking for approximately 1,000 income each month and using a 72t calculator, have determined that I need to set aside $300,00 for 72t purposes. I will be moving this to another mutual fund company specifically for this purpose. 1. I would like to have 2 accounts (maybe $150,000 in each?) with the mutual fund company and only withdraw from one of these. Is this ok? The one account should be sufficient for all of the withdrawals, OR would it be better to put the entire 300,000 in one account?2. The mutual fund company will provide a 1099 with the code of 1 (under age 59 1/2 early distribution). Do I just need to fill out the 5329 when filing taxes to state this is a systematic withdrawal and qualifies for the 72t exception? Will I have to give them some type of supporting documentation too?3. I can have federal taxes withheld (as the money will be considered income). Can I assume that I will also owe state income taxes on this?4. Since this is November and the first payment would be in January, do I need to re-compute the rate with the 72t calculator closer to January (or doesn’t it matter)? 5. Is there something else that must be filed with the IRS other than the 5329? How does the IRS even know about the plan?…how would they know if something was changed, etc? (I realize that it cannot be changed after it is setup, but I don’t understand how the IRS would know this.)6. Is there some kind of record keeping I need to do so that I do not encounter an IRS issue over the next 5 1/2 years? In general, I am just unsure of the process in setting this up myself. I have not been able to find help other than from advisors who mandate I must use their investments. Thanks for any direction you can provide.2014-11-06 17:41, By: Rain, IP: [220.127.116.11]
L2: New 72t – Questions regarding setting up the 72t1. a. Use the “reverse calculator” to determine the minimum amount you have to set aside at the applicable federal interest rate to generate the income you want. Be careful to use the right monthly figure. For example. if you want $ 1,000 net of 25% federal income tax, then you need $ 1,333.33 gross income. On the other hand, if you set it up to generate $ 1,000 gross income, and then withhold 25%, you will only get $ 750 the cash flow. Then put the rest into a non-SEPP 72-T IRA account.
2. You just need to keep your documentation of the specific account(s) and balance(s) used for your calculation. it is ultimately between you and the IRS, and most companies do not want your documentation.
3. PA does not tax IRA distributions after 59 1/2, and before 59 1/2 it uses a “return of contribution” first, which is not taxable. So, in PA the distributions are not taxable until all of your contributions have been recovered. You’ll have to talk to a tax practitioner in your state, or move to PA.
4. You will probably want to consider using the highest month-end balance from 7/31 thru 12/31/2014, and the interest rate changes will be of less importance.
5. None of your documentation has to be sent to the IRS, but many tax preparers do send it anyway just to bury IRS in the paperwork. The IRS has no way to check if your annual distributions are correct, unless or until you might be audited for something else.
6. Make sure that your annual 1099-R shows the same annual distribution, unless you prorate the first and last year.
CONGRATULATIONS ON ACCUMULATING $ 1.5 MILLION AT YOUR AGE.2014-11-06 18:09, By: dlzallestaxes, IP: [18.104.22.168]
L3: New 72t – Questions regarding setting up the 72tYou might want to consider starting the plan before 54 1/2, so the plan will expire when you turn 59 1/2 in January 2020, and you’ll be free to do whatever you wish. Just make sure to take 60 equal monthly, or 5 annual distributions. Read the planning pointers found on the lower left on this sites home page for documentation requirements. No real need to change custodians, but you will need a separate account. There’s enough information on this siteto do this if you read enough. You state tax requirements will be based on your state.2014-11-11 21:28, By: Scott, IP: [22.214.171.124]