Switching to RMD method

L1: Switching to RMD methodI have a client that has been on 72t amortization method for 5 years and wants to switch to the RMD method. The balance of the account is 290,000 as of 5/1/06. The client will be 55 in December. They have currently taken 32,000 from the plan under the current 72t in 2006.
Can the client use the 5/1/06 balance and figure the RMD annual amount based on her life expectancy and then figure out the monthly amount based on dividing the calculated amount by 12? This would seem to make the most sense since they are electing to change now and essentially ending the old plan and beginning the RMD mid year.
Wouldthe client need to use the 12/31/05 balance to calculate the amount instead and then calculate the monthly amount the same way, dividing by 12 and using that number for the remainder of 2006?
I was told by the custodian that the plan would have to be based on the 12/31 value, and then subtract what has already been taken for the year, with the remaining balance spread over the remaining months. If that is the case, then this client would not be able to switch until next year since they have already taken more than the minimum amount.Thisdoes not seem right since the ruling is intended to give relief in just such a case.
Please advise.2006-05-02 16:49, By: IRISH, IP: [66.42.140.168]

L2: Switching to RMD methodYou”ll probably get some other answers, but I agree with the custodian “the plan would have to be based on the 12/31 value, and then subtract what has already been taken for the year, with the remaining balance spread over the remaining months.” 2006-05-02 17:00, By: Gfw, IP: [172.16.1.72]

L2: Switching to RMD methodHello Irish:
I will provide the different opinion. If your client commenced their SEPP plan in 2002 or earlier (looks like it) and the $32k does represent the correct prorata distribution amount under the old plan through 4/30/06; then yes they may elect to perfrom a mid-year switch to the RMD method.
As an example, using $290k and age 55 would then yield a total distribution for 2006 of $9797. However, as the switch is occurring as of 5/1 then 2/3rds of this amount would be distributed for 2006 or $6532. Then you would reclaculate again at 12/31/06 to determine the full 2007 distribution under the RMD method.
TheBadger
wjstecker@wispertel.net
2006-05-02 17:42, By: TheBadger, IP: [66.109.211.254]

L2: Switching to RMD methodIf enough of the 32,000 that has already been taken can be rolled back to the IRA within 60 days of distribution, it seems like PLR 2004 19031 provides considerable support for the midyear switch. This would enable use of the 12/05 balance to compute the RMD method calc for 2006. While the IRA custodian requires this to code the 1099R with a 2, they may still need to be provided with the PLR regarding the roll backs and may still refuse the 2 code. Taxpayer could then file a 5329 and claim the SEPP exception. This would take immediate action to see if the 60 day limit permits rolling back enough to get under the annual RMD annual amount.2006-05-02 22:00, By: Alan S., IP: [24.116.165.157]

L2: Switching to RMD methodThe following sentence of the scenario …
“They have currently taken 32,000 from the plan under the current 72t in 2006.”
and the three responses raise questions.
Bill, are you saying they can take the full yearly distribution under the old plan ($32,000) which it looks like they have already done, make a mid-year switch to RMD and then take the new amount you calculatedfor 2006? If so they will take about $39,000 in 2006. If not they will have to do the 60-day rollover Alan described so as not to exceed the recalculated 2006 RMD amount of $6,000 that you calculated.
Jim2006-05-03 09:56, By: Jim, IP: [70.184.1.35]

L2: Switching to RMD methodHello Jom:
Not at all. What I was suggesting is that one can bifurcate the calendar year into two years; say 1/3rd and 2/3rds and as long as the correct PRORATA amount under the old method is distributed physically during the 1st third of the year; then it would be okay to switch to the RMD method on 5/1; calculate the annual RMD amount as of 4/30 and then distribute 2/3rds of that amount in the remainder of the year.
TheBadger
wjstecker@wispertel.net

2006-05-03 18:53, By: TheBadger, IP: [66.109.211.254]

L2: Switching to RMD methodBill:
I”m pretty sure I follow your logic for making the switch. But there is one question about the current distribution plan that I”m not clear on.
Irish:
Under the current 72(t) plan that has been running for five years, what is the annual distribution amount? The unanswered question is the following: Does the $32,000 referenced in your post represent the total, annual distribution amount, or is it part of the total amount? That”s why my first question is so important.
Jim2006-05-04 10:29, By: Jim, IP: [70.184.1.35]