Starting a 72t in mid year
L1: Starting a 72t in mid yearI am 52 years old. I am going to start a 2nd 72t on a $400k IRA in March 2010. I started my first 72t on a $200k IRA in January 2009. I don’t want to start the 2nd 72t in January 2010 because I need the mid-term rates to rise and I want to go through a tax return on the 1st 72t to see how that works out.
My question is: Can I start the 2nd 72t in March and still take the same monthly amount that the annual calculator gives? Do I have to take an annual amount or a monthly amount that is substantually equal? My concern is about not starting in January which would result in 12 payments over the year and equal annual paymets there after. If I start in March there will be a smaller total distribution in 2010, but the monthly distributions will be the same for the 7 year run.
Thank you for your help. This site has helped me enormously.2009-10-30 13:16, By: telcoguy, IP: [184.108.40.206]
L2: Starting a 72t in mid yearAny month you select for your first distribution for the new 72t plan will provide you with a choice of taking out either the full annual amount or the pro rated amount based on the month you start. The distribution pattern you select can be changed within the year or from year to year. This means that if you expect interest rates to rise, you could hold out for several months and still take out the full annual amount in 2010, but if the rates fall, you will ultimately get less. Predicting rate direction is a gamble, but you do have the two month choice on which monthly rate to select.The IRS does not work fast enough for you to see how they react to your first plan, unless you plan to delay to the end of 2010. But if you have any doubts about the accuracy of the first plan, you should get them resolved before starting another plan.To respond more directly to your question, you CAN startafter January and take out 1/12 of the annual amount each month, but if you do that you obviously will get less than if you elected to distribute the full annual amount. The pattern of your distributions from month to month do not matter as long as the annual total exactly matches the annual calculation, or in the first year a pro rated amount of the annual calculation based on the month you start.Remember that these two IRA accounts must remain totally separate and no funds can be exchanged between them at anytime because you will have two totally separate and independent 72t plans. If you happen to bust one of them, the other will not be affected unless you move funds between them.2009-10-30 16:11, By: Alan S., IP: [220.127.116.11]
L3: Starting a 72t in mid yearThanks for the reply
I am confident about my 1st 72t calculation, thanks to this site.
I just want to get through one tax return to complete the first 72t year. Then I will know how Vanguard documents the distribution. I made the mistake of taking too little out of the 1st 72t. The next time I hope to push toward 6% real distribution rate if the Feds allow it.
Thanks again2009-10-30 18:01, By: telcoguy, IP: [18.104.22.168]
L4: Starting a 72t in mid yearVanguard, and most financial institutions, will code it as a “1”. They no longer want to take any responsibility for the exceptions that might be claimed. Without a certified copy of your birth certificate they do not know your date of birth and age. They have no way of knowing all of the IRA accounts that you might be including in the universe, only the ones from their company. etc, etc.This is no problem. Your tax software can easily prepare the 5329 form with the appropriate exception that YOU are claiming. Start the 2nd SEPP 72-T whenever you need the additional money. If you start in 2010, you can take the annual distribution whenever you want to, or a prorated portion based upon the month of your first distribution. There is no requirement that your distributions during any year be equal for every payment, but only that the annual or prorated 1st year amounts be correct by 12/31 of any year.2009-10-30 18:48, By: dlzallestaxes, IP: [22.214.171.124]
L4: Starting a 72t in mid yearTelcoguy,What do you mean by “I hope to push towards 6% real distribution rate”? The mostrecent max rate (posted for11/09) is in low 3% range, and last 5 months have all posted in low to mid 3% range, so if you mean using a 120% Fed Mid Term rate for distributions starting in March 2010, it would have to be either the JAN or FEB 2010 posted rate, and I don’t think you will even see it get to a 4% rate by then, (in next three months) but that is just an uneducated observation on my part. KEN2009-10-31 03:47, By: Ken, IP: [126.96.36.199]
L5: Starting a 72t in mid year
Ken – Your observation seems astute to me, so count me in the same camp.
One way to eliminate timing difficulty with distributions starting in March is to take quarterly distributions. This covers the Jan-Feb-Mar time period in the 1st 2010 distribution. I selected quarterly distributions for this reason and it has worked well for me.2009-10-31 17:42, By: Ed_B, IP: [188.8.131.52]
L6: Starting a 72t in mid yearWith respect to Ed-B’s quarterly payment observation, when I started my 2nd 72T in May 2007 (to supply the $$ for mortgage payments on2nd home we justbought) I advised Vanguard to give me 5 months worth of 2007 payments in May, and then starting in June, give me monthly payments going forward, so the first year, altho started “late” had a full year’s worth of payments, and I opted not to recalc, so that monthly payment continues unchanged. Those payments arrive in my checking account at same time they are pulling the mortgage payment out of my checking account, and work very well. In 2010, I amgoing to change the first (larger) 72t to RMD plan, which will cut my payments in half until it ends in March 2011, now that we sold our primaryhome, and paid down the mortgage on the “second home” which is now our primary home. A third IRA that is not involved in a 72t is available for any extra non penalty withdrawals if the RMD payments leave me a little short, now thatI am 59 /1/2, so it has all worked pretty well.KEN2009-10-31 19:38, By: Ken, IP: [184.108.40.206]
L7: Starting a 72t in mid yearKen:Yes, that is another perfectly good way to handle this situation.I believe that it is important to take a full year’s worth of payments in the 1st year of any 72t plan. This avoids the issueof a “stub year” at the start and end of the 72t plan. While a perfectly fine 72t plan can have stub years in it, it just seems easier to me to figure out when the plan ends if I don’t have to contend with stubs.Although I did use the 1st payment date modification calculator on this great web site and printed off the output from that as my confirmation, it is easier for me to think of this in terms of full years. I am looking forward to the end of my 72t plan on its 5th year anniversary, which happens on 3/15/2010. 2009-10-31 21:52, By: Ed_B, IP: [220.127.116.11]
L7: Starting a 72t in mid yearIt will cost you a fortune if you mistakenlystop your 2nd SEPP 72-T in May 2011, and take ANY distribution before June of 2012. You started in May 2007, and therefore must continue thru May 2012, not May 2011, even though your 5th annual payment is taken in May 2011. Check the calculator on this website as to when your plans END.2009-11-01 04:21, By: dlzallestaxes, IP: [18.104.22.168]
L8: Starting a 72t in mid yearDLZ,Please reread my post. I have 2 SEPP plans. The 2nd one started in May 2007. The first (larger one) that I plan to change to RMD next yearis one that started in March 2006, the year after I retired at age 55. It is 3 times larger than the second one. Now that we only own one home, and have a much smaller mortgage on the newer home, I will still be taking about $75K per yearfrom my two SEPP plans after this RMD switch, and until the first one ends in March 2011. I am leaving the smaller (2nd) SEPP plan alone, since I knowI will needat least that much from some IRA, so it can “run” until May 2012, although I understand that I can stop the payments at end of 2011, since I will have 5 yrs of payments made at that point.KEN2009-11-01 14:11, By: Ken, IP: [22.214.171.124]
L5: Starting a 72t in mid yearKen
The 120% mid-term rate and the “real” resulting distribution rate are different.
This is the calculation for my 1st 72t plan which I started in January 2009.
December 2008 mid-term rate=3.43%
My age on my August 2009 birhday in the starting year 2009=52 years old
IRA balance on 12/31/08=$195,780
This gives a 72t Ammortization Result of $10,120 annual distribution ($843.35 monthly)
$10,120 is %5.17 of the IRA starting balance even though the IRS mid-term rate was only %3.43. If I have made an error please let me know.
Thanks for all the comments.2009-11-01 22:29, By: telcoguy, IP: [126.96.36.199]
L6: Starting a 72t in mid yearTelco guy,I just wanted to make sure you weren’t hoping to use a6% 120% Fed mid term rate. You seem to have a good grasp of it, and the calculatoron this site proved out your Amort distribution figures for the 1st SEPP. Good luck. KEN2009-11-01 22:56, By: Ken, IP: [188.8.131.52]