tIRA 72(t) - start date and end date

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michaeljc70
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tIRA 72(t) - start date and end date

Post by michaeljc70 »

I am likely taking a 72t withdrawal soon annually from my tIRA. I am 51. I will need to continue this until age 59.5. What I don't know is the specifics regarding the dates. I believe it is beneficial if I wait until I am 51.5 to start this way there will be 1 less mandatory withdrawal. Is that correct?
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David Jay
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Re: tIRA 72(t) - start date and end date

Post by David Jay »

That would appear to be correct, as the stipulation per the Wiki is 59 1/2 plus one day (and 5 years, which you are easily exceeding). So if you are taking annual distributions and you want to distribute the minimum amount you should wait until (two days after) age 51 1/2. Per the Wiki, you have a choice of the distribution frequency and can choose to take distributions quarterly or monthly. If you did them monthly you could start the month before you turn 51 1/2 and only need to take one additional payment (1/12 of the equivalent annual payment) to reach 59 1/2.

It sounds as if you are looking to control the amount of the distributions. Per the Wiki the smallest withdrawals occur with the RMD method.

Wiki link here: https://www.bogleheads.org/wiki/Substan ... c_payments
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michaeljc70
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Re: tIRA 72(t) - start date and end date

Post by michaeljc70 »

David Jay wrote: Wed Sep 22, 2021 11:31 am That would appear to be correct, as the stipulation per the Wiki is 59 1/2 plus one day (and 5 years, which you are easily exceeding). So if you are taking annual distributions and you want to distribute the minimum amount you should wait until (two days after) age 51 1/2. Per the Wiki, you have a choice of the distribution frequency and can choose to take distributions quarterly or monthly. If you did them monthly you could start the month before you turn 51 1/2 and only need to take one additional payment (1/12 of the equivalent annual payment) to reach 59 1/2.

It sounds as if you are looking to control the amount of the distributions. Per the Wiki the smallest withdrawals occur with the RMD method.

Wiki link here: https://www.bogleheads.org/wiki/Substan ... c_payments
I was going to take an annual withdrawal hence wanting to avoid an extra one since it will be decent size. I was thinking to do annual because it is simpler. My brokerage doesn't allow me to specify percentages so I would have to manually sell according to my AA before the withdrawal date. If you forget to do so then your withdraw cannot go through. The form says "The account you are requesting this payment from must have sufficient cash funds for the distribution. A missed payment not corrected by year's end constitutes an alteration of the schedule and will terminate the exception." The tax implications are scary if something goes wrong.
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David Jay
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Re: tIRA 72(t) - start date and end date

Post by David Jay »

michaeljc70 wrote: Wed Sep 22, 2021 11:52 amThe tax implications are scary if something goes wrong.
Yes, great care needs to be taken.

That is why so many seek alternate methods (457b, Rule of 55, Roth conversion ladder, etc.)
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Alan S.
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Re: tIRA 72(t) - start date and end date

Post by Alan S. »

michaeljc70 wrote: Wed Sep 22, 2021 10:54 am I am likely taking a 72t withdrawal soon annually from my tIRA. I am 51. I will need to continue this until age 59.5. What I don't know is the specifics regarding the dates. I believe it is beneficial if I wait until I am 51.5 to start this way there will be 1 less mandatory withdrawal. Is that correct?
Are you primarily concerned with the total amount distributed under the 72t plan or the number of distributions.

Since this plan terminates at 59.5, you have separate options for both year 1 and the final year attaining 59.5. You can mix and match those options, which are:
1) Distribute full annual amount
2) Distribute a pro rated amount by the month. For example, if first distribution is in October, you can distribute 25% of your annual (3 months worth).
3) For the final calendar year only, as an additional option you can distribute 0.

Your statement about one less withdrawal appears to suggest that you are looking at this plan as a fiscal year plan. That is not correct, as 72t plans are inherently calendar year plans. If you want to take a full annual in the first year, even though the plan starts in December, you can. A full annual may be more than you need at the time, but if you save the excess it can serve as insurance against busting your plan if you are hit with high one time expenses in a later year.

With respect to the start date of your plan, it is the date that your IRA custodian made the first distribution, not the date you received it. The ending date of a plan that is not a 5 year plan is the day you reach 59.5. In that year, as stated above you have 3 options prior to the plan termination date.

Generally, avoid the RMD method. It produces the lowest payout per dollar of IRA balance which means you need a larger account balance to fund the same dollar distribution, you must make a new calculation every year which increases risk, and you lose the flexibility of the one time switch to the RMD method.
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David Jay
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Re: tIRA 72(t) - start date and end date

Post by David Jay »

^^^ I defer to the expert.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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michaeljc70
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Re: tIRA 72(t) - start date and end date

Post by michaeljc70 »

Alan S. wrote: Wed Sep 22, 2021 6:34 pm
michaeljc70 wrote: Wed Sep 22, 2021 10:54 am I am likely taking a 72t withdrawal soon annually from my tIRA. I am 51. I will need to continue this until age 59.5. What I don't know is the specifics regarding the dates. I believe it is beneficial if I wait until I am 51.5 to start this way there will be 1 less mandatory withdrawal. Is that correct?
Are you primarily concerned with the total amount distributed under the 72t plan or the number of distributions.

Since this plan terminates at 59.5, you have separate options for both year 1 and the final year attaining 59.5. You can mix and match those options, which are:
1) Distribute full annual amount
2) Distribute a pro rated amount by the month. For example, if first distribution is in October, you can distribute 25% of your annual (3 months worth).
3) For the final calendar year only, as an additional option you can distribute 0.

Your statement about one less withdrawal appears to suggest that you are looking at this plan as a fiscal year plan. That is not correct, as 72t plans are inherently calendar year plans. If you want to take a full annual in the first year, even though the plan starts in December, you can. A full annual may be more than you need at the time, but if you save the excess it can serve as insurance against busting your plan if you are hit with high one time expenses in a later year.

With respect to the start date of your plan, it is the date that your IRA custodian made the first distribution, not the date you received it. The ending date of a plan that is not a 5 year plan is the day you reach 59.5. In that year, as stated above you have 3 options prior to the plan termination date.

Generally, avoid the RMD method. It produces the lowest payout per dollar of IRA balance which means you need a larger account balance to fund the same dollar distribution, you must make a new calculation every year which increases risk, and you lose the flexibility of the one time switch to the RMD method.
Alan, I respect your advice as I have found you to be accurate in multiple forums. But, I am not quite understanding you. Let's stick to annual withdrawals since that is my intention. Are you saying it is annual tax year (Jan-Dec)? I guess I am not quiet understanding.
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Re: tIRA 72(t) - start date and end date

Post by Alan S. »

Yes, all 72t plans are calendar year plans, just as the 1099R you will receive covers a full calendar year.

If you want to simply withdraw the full annual amount every calendar year and want to take a single distribution in each year, you can do so and it will comply with the rules.

If your calculation method results in a distribution of 10,000, you would take a full annual distribution as your starting distribution. You will get a 1099R for that year for 10,000.

Every year thereafter you would also take a distribution of 10,000, and in the year you reach 59.5 you would take your 10,000 distribution prior to reaching 59.5. You will find that while your plan encompasses just 8 years, it will cover parts of 9 different calendar years and total 9 annual distributions.

My earlier post included options for the first and last calendar years to reduce your distributions in those years and preserve your IRA money for after the plan ends, but if you want to avoid that complication and the increased risk that you will make an error, you can.

If you want to set up automatic annual distributions with your IRA custodian, I would avoid the first week of the year and the last 2 weeks of the year to reduce the chance that a distribution does not get done in the correct year. Note that you cannot take any distributions from the IRA other than 72t plan amounts and cannot make any contributions to the IRA either, as such transactions are not permitted and would bust the plan.
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michaeljc70
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Re: tIRA 72(t) - start date and end date

Post by michaeljc70 »

Say I am taking out $25k per year per the 72t calculation based on the method I choose, my birthday is 5/1 and I take my first annual distribution on 11/15. In the year I turn 59.5, with my birthday being in May and my distribution being in Nov, do I have to take the $25k out that year? That is what I am not quite understanding.
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Re: tIRA 72(t) - start date and end date

Post by MarkNYC »

Alan S. wrote: Wed Sep 22, 2021 11:21 pm
Note that you cannot take any distributions from the IRA other than 72t plan amounts and cannot make any contributions to the IRA either, as such transactions are not permitted and would bust the plan.
Alan - I don't believe that is fully correct. Subparagraph (A) of section 72(t)(2) provides 8 exceptions to the 10% early distribution penalty. Substantially equal periodic payments (SEPP) is one of those 8. Other subparagraphs provide separate exceptions to the penalty, for example: (B) medical expenses in excess of the deductible threshold, (E) higher education expenses, and (F) first-time home purchase.

The court has ruled (Benz v Comm. 132 TC 15) that additional IRA withdrawals used for higher education, falling under a separate and independent penalty exception, do not modify the SEPP plan, thus do not trigger the penalty. The opinion suggests that the same would apply to additional withdrawals used for medical expenses and first-time home purchase.
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Re: tIRA 72(t) - start date and end date

Post by MarkNYC »

michaeljc70 wrote: Thu Sep 23, 2021 10:09 am Say I am taking out $25k per year per the 72t calculation based on the method I choose, my birthday is 5/1 and I take my first annual distribution on 11/15. In the year I turn 59.5, with my birthday being in May and my distribution being in Nov, do I have to take the $25k out that year? That is what I am not quite understanding.
Alan has not yet responded, but in a post above he stated (without explanation) that "For the final calendar year only, as an additional option you can distribute 0." Here is my interpretation and explanation as to why that statement is correct.

If you take your first distribution at age 51 on Nov. 15, that date starts the 5-year period where you cannot modify the SEPP plan, if the 5 year period extends beyond age 59.5. But in your case age 59.5 comes much later, so the 5 year period is not relevant. Subsequent annual distributions can be taken at any time during the year, up to and including Dec. 31. In the year you reach age 59.5 on Nov. 1, having taken no distributions by Nov. 1 in that year is not a violation of the SEPP plan because you have until Dec 31, but as of Nov. 2 you are beyond age 59.5 so you are at that point free to modify the SEPP plan without penalty, which means you can take any distribution amount (or zero) for that year with impunity.
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Re: tIRA 72(t) - start date and end date

Post by Alan S. »

MarkNYC wrote: Thu Sep 23, 2021 11:21 am
Alan S. wrote: Wed Sep 22, 2021 11:21 pm
Note that you cannot take any distributions from the IRA other than 72t plan amounts and cannot make any contributions to the IRA either, as such transactions are not permitted and would bust the plan.
Alan - I don't believe that is fully correct. Subparagraph (A) of section 72(t)(2) provides 8 exceptions to the 10% early distribution penalty. Substantially equal periodic payments (SEPP) is one of those 8. Other subparagraphs provide separate exceptions to the penalty, for example: (B) medical expenses in excess of the deductible threshold, (E) higher education expenses, and (F) first-time home purchase.

The court has ruled (Benz v Comm. 132 TC 15) that additional IRA withdrawals used for higher education, falling under a separate and independent penalty exception, do not modify the SEPP plan, thus do not trigger the penalty. The opinion suggests that the same would apply to additional withdrawals used for medical expenses and first-time home purchase.
Yes, I was aware of Benz v Commissioner which found that distributions for certain penalty exception purposes did not modify the 72t plan. But since I was only making a general statement and OP's question only addressed the number of distributions and plan starting and ending dates, I decided not to mention such things as tax court cases.

It is unfortunate that IRS enforcement of 72t rules leans heavily on PLRs and enforcement practices rather than the issuance of IRS Regs or tax code provisions which would provide more detailed rules about these plans.

While the Benz case could have led to additional such exceptions beyond higher ed, I am not aware of any follow up cases that would justify a taxpayer depending on the Benz decision to shield them from busting the plan.
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Re: tIRA 72(t) - start date and end date

Post by DVMResident »

I was going to take an annual withdrawal hence wanting to avoid an extra one since it will be decent size
72(t) applies per IRA.

To ask the obvious question: if you want lesser distributions, have you considered splitting the IRA to the desired size and applying the 72(t) to that one IRA?
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michaeljc70
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Re: tIRA 72(t) - start date and end date

Post by michaeljc70 »

DVMResident wrote: Fri Sep 24, 2021 10:15 am
I was going to take an annual withdrawal hence wanting to avoid an extra one since it will be decent size
72(t) applies per IRA.

To ask the obvious question: if you want lesser distributions, have you considered splitting the IRA to the desired size and applying the 72(t) to that one IRA?
I am not really looking to reduce my withdrawals now. However, in 8 years who knows where I will be. I could have inherited an IRA that requires me to take RMDS or my spouse (that still works) may be making much more money or my taxable account grew to where I don't need that last withdrawal or something like that.

Your point did make me think of another option which I think is allowable. I could split the account up and start the 72t now on one account and then only start the 72t on other account(s) as needed. Is there a downside to this (other than not getting as much money at the beginning)?
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Re: tIRA 72(t) - start date and end date

Post by secondcor521 »

michaeljc70 wrote: Fri Sep 24, 2021 10:54 am
DVMResident wrote: Fri Sep 24, 2021 10:15 am
I was going to take an annual withdrawal hence wanting to avoid an extra one since it will be decent size
72(t) applies per IRA.

To ask the obvious question: if you want lesser distributions, have you considered splitting the IRA to the desired size and applying the 72(t) to that one IRA?
I am not really looking to reduce my withdrawals now. However, in 8 years who knows where I will be. I could have inherited an IRA that requires me to take RMDS or my spouse (that still works) may be making much more money or my taxable account grew to where I don't need that last withdrawal or something like that.

Your point did make me think of another option which I think is allowable. I could split the account up and start the 72t now on one account and then only start the 72t on other account(s) as needed. Is there a downside to this (other than not getting as much money at the beginning)?
The only downside I know of is a bit of complexity keeping track of more accounts and possibly multiple 72t streams. I read a long time ago but I think it is still correct that you can have multiple 72t streams (each from it's own IRA, of course), with each stream using a different method (as long as it's an IRS approved method, of course). So you could start your first 72t stream using the RMD method, then a second 72t stream using the amortization method, for example.
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