Reverse Engineer 72t calcs, and switch to RMD
L1: Reverse Engineer 72t calcs, and switch to RMDA friend has been taking 72t distributions of $2,400 per month since April 2, 2007, but has no documentation of calculations, and cannot obtain it, but he has obtained his Feb, March and April 2007 IRA account statements. He wants to switch to RMD method for 2011, so I’m thinking it’s especially important to be prepared for an audit, and am thinking the best we can do is reverse engineer the calculations, and use the template on this website to document the 72t.Using the February 2007 IRA account statement balance of $518,732 and an interest rate of 3.265% generates a calculated annual distribution amount, $27,599.98, that is within two cents of the of actual annual distribution amount, $27,600, using the amortization formula or the spreadsheet PMT function (the calculator on this website only supports 2 decimal places, but I’ve checked my spreadsheet-calculated results using percentages to 2 decimal places against the calculator and they are in agreement). Age at end of 2007 was 55, so I used a life expectancy of 29.6, based on single life expectancy table. From the table on this website I get the 120% Midterm rates of 5.65% and 5.84% for Feb and March 2007, so according to my understanding using the calculated rate of 3.265% is fine, since it’s below the applicable midterm rates.Based on his distributions, we would document 2007 as a stub year.Question 1: Is there anything wrong with the approach or calculations above? If so, what would be better?Here are the numbers for switching to the RMD method for 2011:
– IRA account balance as of Dec 31, 2010: 398,898.77- age at end of 2011: 59 (on August 1)- use Uniform Lifetime table to minimize distributions, so life expectency = 37.8 (assume no problem using Uniform Lifetime even though used Single Life Expectancey previously)- RMD = $10,552.88
Distributions already taken through March 2011 =$2,300 X 3 = $6,900, so will take $10,552.88 – $6,900 = $3,652.88 for remainder of 2011 RMD.Question 2: Everything look OK with the switch to RMD for 2011?Question 3: To document switch to RMD, basically create a second 72t plan document, noting the switch to RMD and including the numbers used and the calculated RMD?Question 4: Finally, my understanding is that no distribution will be required for 2012, because first payment modification date is 4/2/2012 (date of birth = 8/1/1952, first payment date = 4/2/2007), assuming no additions to or distributions from the IRA after taking the 2011 RMD. Correct?Thanks!2011-03-30 17:33, By: 72tHelper, IP: [188.8.131.52]
L2: Reverse Engineer 72t calcs, and switch to RMDWith regard to the Uniform Life table “switch” in 2011 when computing RMD change for a SEPP 72T plan, I noticed that Gordon’s calculator for SEPP 72-T on this sitelists results for all three SEPP methods (Amort, Annuit, and RMD) and it shows the samelife expectancy of 26.1 yrs (above the results) for the age 59, with results for all three methods listed. That is the way I recomputed my withdrawal when I switched from Amort to RMD in 2010, and I was also 59, so I used the 26.1 figure. I also noticed on a Fidelity web site (from a Google search for”Uniform Life table”) that it started the Uniform Life Table with age 70, so perhaps that is what that table is intended for RMD’s after age 70. It just does not makes sense to me that you can have a life expectancy in first yr of the SEPP of 29.6, and then 4 yrs later, when choosing to switch to RMD to finish the SEPP plan, you can use different table that has life expectancy of 37.8. That may not pass the smell test. Let’s see what others more knowledgeable than me have tosay. KEN2011-03-30 20:43, By: Ken, IP: [184.108.40.206]
L3: Reverse Engineer 72t calcs, and switch to RMDKen, you can see the full Uniform Lifetime table in Rev. Rul. 2002-62 on the IRS website. This version includes ages below 70, and shows life expectancy of 37.8 for age 59. The version of the table you’re seeing is based on Pub 590, and is intended for use by those age 70 1/2 or older in determining RMDs, so doesn’t show ages below 70.You can use Uniform Lifetime in the calculator by toggling Use Uniform Table to Yes, and it will show life expectancy of 37.8 for age 59.I agree it seems a bit strange that you could switch tables when switching to RMD, but I don’t see anything in the rulings that indicate you can’t. I do want to make sure it’s OK before doing so.Thanks!
2011-03-31 01:46, By: 72tHelper, IP: [220.127.116.11]
L4: Reverse Engineer 72t calcs, and switch to RMDThat’s right. Appendix A in RR 2002-62 shows the Uniform Table down to age 10. Appendix A was not included in the 2002-62 posted on this site. Really, it is just a convenient spin off of the joint life table that eliminates the need to find the intersect between the taxpayer and beneficiary 10 years younger.It is also generally concluded that the wording in the “life expectancy” section of 2002-62 allows a switch of tables when doing the one time switch to RMD. Generally, that will entail changing from the single life calc for a fixed dollar method to maximize payout to the uniform or joint life table (better if beneficiary > 10 years younger) to reduce payouts under the RMD method.That said, Gordon does not approve of us posting reconstructive strategies for those that did not retain documentation of their initial calculation, so I will not go there.Therefore, will limit comment to a couple specific areas only rather than the overall strategy:1)I do not understand how 2007 stub year annual calculation you posted relates to the 2400 per month that was distributed. When the annual calculation is determined in a stub year, the only two options are withdrawing the full annual amount or a pro rated amount by the month. Since the first distribution was in April, the only other allowable figure is 75% of the annual amount.2)2012 cannot be a “no distribution year” unless 2007 was a full distribution year, ie the full annual amount was withdrawn such that 60 months worth would be withdrawn by the end of 2011. If 9 months were withdrawn in 2007, then at least 3 months would have to be distributed in 2012 prior to the early April modification date. This is unaffected by any one time switch to RMD done during the tenure of the plan.2011-03-31 02:18, By: Alan S., IP: [18.104.22.168]
L5: Reverse Engineer 72t calcs, and switch to RMDAlan,
1. Oops, my original post should’ve stated 2,300/month (27,600/12), so first year distributions were 9/12 or 75% of annual distributions in subsequent years, so it is a valid stub year based on your input. Thanks for catching the error in my post.
2. Thanks for the input on 2012 distributions. Can you point me to references, rulings or anything that clarifies this point? At any rate, based on your input, friend would be required to take a distribution of 3/12 = 1/4 of RMD amount calculated for 2012, assuming he switches to RMD method for 2011correct?
Regarding posting reconstructive strategies, would appreciate more input from anyone on the guidelines. Is this something we’re just not supposed to discuss at all on this forum? Is there any standard advice for someone in this situation?
Thanks much!2011-03-31 20:20, By: 72tHelper, IP: [22.214.171.124]
L6: Reverse Engineer 72t calcs, and switch to RMDRE: your #2 question in last post… I think that Alan’s point is you haven’t fulfilled the 5 year minimum (in your case -60 months of withdrawals) of distributions if you stop pmnts at end of 2011, so 3 more monthly payments wouldbe needed in 2012, along with being over 59 /12 to meet both of those 72-T requirements. Ken2011-03-31 22:34, By: Ken, IP: [126.96.36.199]
L7: Reverse Engineer 72t calcs, and switch to RMDKen is correct, 60 months of distributions is a minimum unless the plan ends due to death, disability or being busted. But in 2012, a full year is also an option prior to the modification date.Re the reconstructive strategies, Gordon would have to address that since this is his site. I believe he wants to encourage proper documentation up front in writing for these plans and not provide work arounds when the original intent did not comply or was not documented.2011-03-31 23:52, By: Alan S., IP: [188.8.131.52]
L7: Reverse Engineer 72t calcs, and switch to RMDI get the 5 year minimum requirement in general, but saw another post on this site that led me to believe that if turning 59 1/2 in thesixth calendar yearyou couldskip any distribution in that year. I now understand that this would only apply if a full year distribution had been taken in the first year. Really appreciate the clarification on this.Perhaps I should ask specific questions in a new post, thinking that perhaps I’ve “poisoned” this thread by bringing up the “reconstructive strategy”? In case not …If switch to minimum distribution method in 2011, then in 2012 the minimum distribution for compliancewould be 3/12 of the calculated minimum annualdistribution for 2012? I understand that a full year distribution is also an option.2011-04-01 00:02, By: 72tHelper, IP: [184.108.40.206]
L8: Reverse Engineer 72t calcs, and switch to RMDPlease don’t start a new thread if your questions will relate in any way to this discussion so we will have everything in one place.Jim2011-04-01 00:09, By: Jim, IP: [220.127.116.11]