Switching from Annuity Method to RMD
L1: Switching from Annuity Method to RMDI am considering converting a 72t plan from the annuity method to the RMD method. My distributions are made quarterly on the 1st day of Jan, Apr, July and Sept. Since the Q1 distribution made in January 2009 exceeds the full year 2009 distributuion amount under the RMD method, does this mean that I would have to wait until next January in order to implement the switch to a RMD payout? My common sense says yes, since I would otherwise receive total distributions in excess of the permitted RMD for calendar 2009; however, since common sense and the tax code don’t always go hand in hand, I thought I’d ask … The only way I think it could work would be to have a deemed cut-off of the tax year for the annuity method and a deemed start of a new tax year effective as of the date of the switch, but my guess is that this would bust the SEPP (and I’m not sure would be permissible in any event since I’m a calendar year cash-basis taxpayer).2009-02-20 05:39, By: sodeldog, IP: [188.8.131.52]
L2: Switching from Annuity Method to RMDThe solution is to roll back the excess of your January distribution over the RMD method annual distribution within the allowable 60 days period. Asof this date, you are getting fairly close to that deadline. While you cannot rollover a 72t distribution, your new RMD method distribution will apply, and the excess amount is not considered a 72t distribution.
However, be sure you still have a rollover available to you since only one rollover is permitted per 12 month rolling period. This is measured from the date of your January distribution, so look back 12 months from that date to be sure you did not have another rollover that would block out the current one.
Also, be sure you can live with the sharply reduced distribution amount the RMD method will require until the term of your plan ends.
You are correct that doing a mid year effective change to the RMD method presents some problems, although the IRS has not ruled against doing that. Still, it is best to avoid becoming a test case.
2009-02-23 04:13, By: Alan S., IP: [184.108.40.206]
L3: Switching from Annuity Method to RMDAlan, thanks for the feedback and the rollover idea. Since I am still analyzing whether I can safely accept the reduced cash flow for the remainder of the plan period (about 10 years in my case), I couldn’t commit to the rollback within the 60-day window.
I did, however, locate some written materials presented at a 2004 seminar by BISYS Retirement Services which contained the following statement: BISYS Retirement Services was verbally informed by the drafter of Revenue Ruling 2002-62 that in a transition year, an IRA holder may stop annuitization or amortization payments, even if the annual distribution amount exceeds an RMD-based calculation for that year.Û
The example given by them suggested that the IRA holder switching from annuity or amortization methods to RMD could simply cease distributions for the remainder of the year, resulting in total distributions in the transition year in an amount less than under the original plan but more than allowable under the RMD method. In all subsequent years, total distributions would have to conform to the RMD amount in order to avoid busting the SEPP.
Absent some definitive authority, I wouldn’t risk this, but I wondered whether anyone has heard of this approach?
2009-03-06 06:17, By: sodeldog, IP: [220.127.116.11]