starting a 72t
L1: starting a 72tI understand how and the purpose of a 72t. I want to start one on afixed annuity in my individual IRA.I notified the annuity company of what I want to do and they sent me a form called “annuity withdrawal request”.It says nothing about 72t. Using the calculator on your site based on the Annuitization methodI come up with exactly what I need each month using the current interest rate for December.
Question: Do I do everything on my own or is there a set of forms I need? I read though some of the posts and understand about keeping a record of everything. Can you clarify a few things, concerning the IRA I’m going to use for the 72t I can’t add additional funds to it but the account itself can receive interest from the investment in it i.e. the fixed annuity getting 4.55% annually? Conceivably I could start another IRA with x amount of funds and do a 2nd 72t from that account also?
Can you do a 72t on an individual IRA where you have an LLC that has rental properties receiving rents and you buy and sell real estate in?
Thanks for any input on how I get this started.2011-01-07 05:40, By: preidster, IP: [188.8.131.52]
L2: starting a 72tI will address your questions and then give you some other items to consider before starting your 72(t) withdrawals.
When calculating 72(t) distribution amounts, you have to consider the entire value of the IRA account. From one of your later questions it sounds like you are only considering part of the value. For example, if your fixed annuity has a value of $500,000 you must use this amount in your calculations. You can’t “designate” $300,000 for 72(t) and the remaining $200,000 for anything else. It’s all one account.
You are correct that you can’t add funds to the IRA account, even if this annuity allows it, or you will “bust” the plan. Same thing if you take additional funds above the calculated 72(t) amount. Yes, earnings within the account are allowed.
The amortization method will always give you the greatest distribution amount and the annuitization the second largest distribution amount. The RMD or MD method is used to reduce distributions during your 72(t) period, and can only be used once. If you change to RMD then you are stuck with it until you complete your 72(t) requirements … no going back to one of the other methods.
I have addressed this next point above but it is so important I will address it again:
“Conceivably I could start another IRA with x amount of funds and do a 2nd 72t from that account also?”
ABSOLUTELY NOT TRUE! Go back and re-read the second paragraph above. Only one 72(t) per IRA account. If you only have one fixed annuity IRA account, then you would have to split-out some amount of money into a totally new IRA account with a different account number. I doubt the annuity company will allow you to make this type of transaction.
I’ll let someone else address the real estate IRA. All I know about these is they are a bucket of worms.
Additional things to consider when using a fixed annuity for 72(t) distributions:
1. Review the annuity’s “free withdrawal rules” before taking your first distribution. Most fixed annuities allow a 10% per year free withdrawal but it may not jive with your 72(t) requirements. These withdrawals are called “systematic withdrawals” as opposed to “annuity payments” which come from an annuitized annuity. Have your agent explain this in more detail.
2. If you make systematic withdrawals, will you continue to earn the 4.55%? Some annuities state that you will only earn this amount if you DON’T take any withdrawals during the year.
3. Your annual 72(t) withdrawal amount MUST comply with the annuity contract’s “free withdrawal rules” or they will charge you a rather hefty penalty. And if they DON’T credit your account during withdrawal years (Q2), then you will rapidly deplete the corpus of your IRA account.
I hope this helps you and please provide some feedback so we can better understand how you are planning to proceed. This may uncover some other potential problems that would make you “bust” your plan.
Jim2011-01-07 15:25, By: Jim, IP: [184.108.40.206]
L3: starting a 72tThanks for the prompt reply.
Just want to clarify a couple of things. I purchased my annuity from Valic and that is a seperate IRA with them. I have an individual IRA with Provident trust as the custodian which I have 3 structured settlements and the real estate LLC. I used 250K on the 7 year fixed annuity from valic @4.55% annualized. I couldn’t make withdrawals for the first year. The first year is passed and they add interest to the account monthly. Like you said,”they allow withdrawals up to 10% a year”
This is one account and once I get a 72t established on this then I want to look at a 2nd 72t on the custodial account which is seperate.Would it be best to call you guys for additional help? Thanks
2011-01-07 19:21, By: preidster, IP: [220.127.116.11]
L4: starting a 72tREAL ESTATE IN IRAI’ve separated my response into a separate thread re the REAL ESTATE IN IRA issue.
1. It is unclear from your posting if you have an IRA with an LLC that has invested in Real Estate.
2. If so, whydid you do this ?
3. While we usually recommend an LLC for Real Estate investments, I have not heard of the LLC being in an IRA.
4. While there are several companies who TOUT investing inReal Estate for IRAs, I believe that this is a terrible idea from a tax standpoint, for the following reasons :
a. YOU cannot be involved in the Real Estate venture in any way. If you are involved, then you have invalidated that IRA and the entire amount in there is deemed to be a distribution, is taxable, and is subject to the 10% penalty if you are under59 1/2. ( You are allowed to invest in REITs, Real Estate master limited partnerships and trusts,Real Estate Mutual Funds, etc., i.e. where you have no relationship to the properties or management, buit only in your share of the distributions.
b.If you were allowed to invest in real estate that your IRA owns, then youshould realize that :
1) You get -0- benefit from all of the operating expenses and Depreciation, while these would have created a reduced profit, or even a loss if the investment was not in an IRA.
2) You probably made an investment in real estate because you expect it to increase in value. If this investment were not in anIRA, then the future gain would be yaxed as a long-term capital gain, which is taxed at a lower tax rate (currently 15%) than ordinary income. However, ALL DISTRIBUTIONS from an IRA are taxed as ordinary income, usually at 25%-35% ( or higher possibly in the future).
3) When you want to take a distribution,such as when youneed cash, or reach 70 1/2 and are REQUIRED to take a distribution, you must have cash to make that distribution. Will the rental generate sufficient cash flow EVERY YEAR when you will need it ? What happens if the property becomes vacant, and tehre is no rental cash flow, and you cannot sell the property ? There is a 50% PENALTY for failing to take any annual distribution after 70 1/2 regardless of the reason.
Now tell me why you, or some “advisor”, thought that this was the way that you should invest in real estate.2011-01-07 21:02, By: dlzallestaxes, IP: [18.104.22.168]
L5: starting a 72tREAL ESTATE IN IRA
Thanks again for the response.
The LLC was formed within the individual IRA so I can have a checking account for the LLC and check book controlof the funds versus the custodian issuing every check relating to any real estate holdings or transactions i.e. purchases repairs etc. within the individual IRA. I am bound by all the IRA guidelines governingLLCs within an IRA and what Ican and can’t do personally. For all practical purposes I’m just the manager of the LLC. The LLC owns the properties or any qualified investments such as a brokerage account therefore I can’t buy my own existing property, rent or sell any LLC holdings to family, do my own work etc as spelled out under the guidelines of what’s allowed in an individual IRA.
One reason I did it was real estate is a great buy at this time and will appreciate again. It is a tangible asset that until I sell it is producing rental income after expenses yielding me 8.5-9%. Yes there is risk with vacancy, repairs etc.There is risk in the market remember September 2008? Are there any fixed income investments yielding 8.5-9% right now? (No)not CDs, bonus annuities, structured settlements or the like. So coupled with other investments I think it made sense to buy real estate with a portion of my retirement nest egg.
I can’t take money from the LLC it has to go back through the custodian and then if I had a 72t on this account or after 59.5 the custodian issues me a check all within IRS guidelines.
You have a point on taxes when taking distributions, but my income is low at this point in life. I have rental property outside of my IRA funds, and other deductions so with all that each year I’m never over 15%2011-01-09 05:31, By: preidster, IP: [22.214.171.124]
L6: starting a 72tREAL ESTATE IN IRAYou did your research very well.
Most people who invest in Real Estate in their IRAs are not getting this type of return, and do not understand the tax nuances that I pointed out. They have usually been sold on this approach without the appropriate caveats.2011-01-09 05:38, By: dlzallestaxes, IP: [126.96.36.199]