72t - Break up IRA into 2 accounts?
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72t - Break up IRA into 2 accounts?
I believe I am going to start taking a 72t from my tIRA at the beginning of next year to cover early retirement expenses. I am 51. What I am wondering is if it is worthwhile to split my IRA into 2 holding back a portion (maybe 10%) in a new IRA and not using that for the 72t? From what I've read some of the benefits would be:
-If you are desperate for money in an emergency situation, you can tap the non-72t IRA and not be hit with retroactive penalties on all previous withdrawals. It seems unlikely I would need to do this.
-You will have a lower tax burden (obviously because you are taking less out) and can opt to start a 72t on the other account if you need more money later.
-If I use my entire tIRA for the 72t, there is nothing left to do a Roth conversion. It is unlikely that I do that before 59.5 because I get ACA tax credits. One scenario that could make me want to do a conversion is if there is special legislation like for Covid that raises the ACA income limit.
Has anyone done this? Any advice?
-If you are desperate for money in an emergency situation, you can tap the non-72t IRA and not be hit with retroactive penalties on all previous withdrawals. It seems unlikely I would need to do this.
-You will have a lower tax burden (obviously because you are taking less out) and can opt to start a 72t on the other account if you need more money later.
-If I use my entire tIRA for the 72t, there is nothing left to do a Roth conversion. It is unlikely that I do that before 59.5 because I get ACA tax credits. One scenario that could make me want to do a conversion is if there is special legislation like for Covid that raises the ACA income limit.
Has anyone done this? Any advice?
Re: 72t - Break up IRA into 2 accounts?
I would split into two accounts, primarily to address your second bullet. It doesn't sound like you need to max the 72t amount on your IRA, so splitting into two accounts gives you a backup account to tap if you end up needing additional income in the future.
Re: 72t - Break up IRA into 2 accounts?
Good idea, this is a common strategy, mostly for those who have enough total IRA balance to fund the SEPP distribution they need. With these low interest rates, you need a higher balance to generate the same distribution as before.
For that reason, be sure to use the amortization method, which produces the largest payout per dollar of account balance. You can determine whether you want to take advantage of that in the SEPP account, the emergency account or some combination thereof.
Be sure to partition the IRA by direct transfer into the optimal amounts before you request your first SEPP distribution. When you partition the account, you cannot use a valuation date for the SEPP account earlier than the partition date, so be careful to avoid that error.
For that reason, be sure to use the amortization method, which produces the largest payout per dollar of account balance. You can determine whether you want to take advantage of that in the SEPP account, the emergency account or some combination thereof.
Be sure to partition the IRA by direct transfer into the optimal amounts before you request your first SEPP distribution. When you partition the account, you cannot use a valuation date for the SEPP account earlier than the partition date, so be careful to avoid that error.
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Re: 72t - Break up IRA into 2 accounts?
Thanks Alan. I plan to partition this year and take start my 1st SEPP in January on the bigger account. Is it correct that you can use a 12/31/2021 or any date up to when you start the 1st SEPP distribution for the valuation?Alan S. wrote: ↑Fri Oct 22, 2021 6:53 pm Good idea, this is a common strategy, mostly for those who have enough total IRA balance to fund the SEPP distribution they need. With these low interest rates, you need a higher balance to generate the same distribution as before.
For that reason, be sure to use the amortization method, which produces the largest payout per dollar of account balance. You can determine whether you want to take advantage of that in the SEPP account, the emergency account or some combination thereof.
Be sure to partition the IRA by direct transfer into the optimal amounts before you request your first SEPP distribution. When you partition the account, you cannot use a valuation date for the SEPP account earlier than the partition date, so be careful to avoid that error.
One small benefit that I didn't list above is that I can contribute to the non-SEPP IRA (my spouse still works) if needed to keep income below a certain level. Of course, I could just open another IRA to do that.
Re: 72t - Break up IRA into 2 accounts?
And the OP can divide his IRA repeatedly. So, one strategy to try to retain as much as possible in the IRA for the long term is to transfer enough for a five year period into the new IRA and then take SEPP payments from that account until the latter of reaching 59.5 years of age or five years. But also once the account is drawn down to zero you have no further obligation. Then if you still need additional funding, do the whole thing again for another five years.
I don't know if it is possible to have multiple 72t accounts simultaneously.
I don't know if it is possible to have multiple 72t accounts simultaneously.
Re: 72t - Break up IRA into 2 accounts?
Yes, you can use any date generally not more than 6 months prior to the first distribution, but the most obvious date for a January start is the 12/31/2021 closing balance. If you partition soon and the market drops before year end, you can use a date after partitioning that carries the highest balance to generate a larger distribution per dollar of IRA balance. There is also an overall requirement that the opening account balance be representative of the actual balance when the first SEPP distribution is taken, but the IRS has never quantified how close it must be. I would think that if the balance drops 15% or less, you could use the highest balance, but if the market dropped 30%, it would be risky to still use an opening balance that much higher.michaeljc70 wrote: ↑Fri Oct 22, 2021 8:04 pmThanks Alan. I plan to partition this year and take start my 1st SEPP in January on the bigger account. Is it correct that you can use a 12/31/2021 or any date up to when you start the 1st SEPP distribution for the valuation?Alan S. wrote: ↑Fri Oct 22, 2021 6:53 pm Good idea, this is a common strategy, mostly for those who have enough total IRA balance to fund the SEPP distribution they need. With these low interest rates, you need a higher balance to generate the same distribution as before.
For that reason, be sure to use the amortization method, which produces the largest payout per dollar of account balance. You can determine whether you want to take advantage of that in the SEPP account, the emergency account or some combination thereof.
Be sure to partition the IRA by direct transfer into the optimal amounts before you request your first SEPP distribution. When you partition the account, you cannot use a valuation date for the SEPP account earlier than the partition date, so be careful to avoid that error.
One small benefit that I didn't list above is that I can contribute to the non-SEPP IRA (my spouse still works) if needed to keep income below a certain level. Of course, I could just open another IRA to do that.
Re: 72t - Break up IRA into 2 accounts?
Yes, technically you can run multiple totally independent plans that overlap each other. That said, complexity bears it's own risks, first that you may be more likely to make an error and second that the IRS might not understand what you are reporting and you would not want to attract their attention.cbeck wrote: ↑Fri Oct 22, 2021 10:28 pm And the OP can divide his IRA repeatedly. So, one strategy to try to retain as much as possible in the IRA for the long term is to transfer enough for a five year period into the new IRA and then take SEPP payments from that account until the latter of reaching 59.5 years of age or five years. But also once the account is drawn down to zero you have no further obligation. Then if you still need additional funding, do the whole thing again for another five years.
I don't know if it is possible to have multiple 72t accounts simultaneously.
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Re: 72t - Break up IRA into 2 accounts?
To keep things simple, I am planning on making one annual withdrawal in January and putting it into my taxable account. I'll probably put it into a bond fund in there and sell/use it as needed throughout the year. If anything goes wrong, I have 11 months to fix it. My brokerage doesn't have an option to have them sell X fund and send you the proceeds. You have to manaully make sure you sell the security or the withdrawal won't go through.
If I understand how this works correctly, if I don't need the money in January I can push it off as long as I take it out that calendar year.
If I understand how this works correctly, if I don't need the money in January I can push it off as long as I take it out that calendar year.
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Re: 72t - Break up IRA into 2 accounts?
I cannot find definitive information on that other than that seems like an alteration as you are not taking the required SEPPs for the required time period.cbeck wrote: ↑Fri Oct 22, 2021 10:28 pm And the OP can divide his IRA repeatedly. So, one strategy to try to retain as much as possible in the IRA for the long term is to transfer enough for a five year period into the new IRA and then take SEPP payments from that account until the latter of reaching 59.5 years of age or five years. But also once the account is drawn down to zero you have no further obligation. Then if you still need additional funding, do the whole thing again for another five years.
I don't know if it is possible to have multiple 72t accounts simultaneously.
Re: 72t - Break up IRA into 2 accounts?
Even if you adhere to the required SEPPs your account may decline to zero before five years due to capital loss.michaeljc70 wrote: ↑Sat Oct 23, 2021 5:20 pmI cannot find definitive information on that other than that seems like an alteration as you are not taking the required SEPPs for the required time period.cbeck wrote: ↑Fri Oct 22, 2021 10:28 pm And the OP can divide his IRA repeatedly. So, one strategy to try to retain as much as possible in the IRA for the long term is to transfer enough for a five year period into the new IRA and then take SEPP payments from that account until the latter of reaching 59.5 years of age or five years. But also once the account is drawn down to zero you have no further obligation. Then if you still need additional funding, do the whole thing again for another five years.
I don't know if it is possible to have multiple 72t accounts simultaneously.
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Re: 72t - Break up IRA into 2 accounts?
I understand...and think you will have to pay the penalties if you hit zero and cannot take the required distriibutions. It seems very unlikely that would happen though. It would take really bad investments and/or timing. I don't know if continuing your distributions on another IRA is allowed.cbeck wrote: ↑Sat Oct 23, 2021 5:32 pmEven if you adhere to the required SEPPs your account may decline to zero before five years due to capital loss.michaeljc70 wrote: ↑Sat Oct 23, 2021 5:20 pmI cannot find definitive information on that other than that seems like an alteration as you are not taking the required SEPPs for the required time period.cbeck wrote: ↑Fri Oct 22, 2021 10:28 pm And the OP can divide his IRA repeatedly. So, one strategy to try to retain as much as possible in the IRA for the long term is to transfer enough for a five year period into the new IRA and then take SEPP payments from that account until the latter of reaching 59.5 years of age or five years. But also once the account is drawn down to zero you have no further obligation. Then if you still need additional funding, do the whole thing again for another five years.
I don't know if it is possible to have multiple 72t accounts simultaneously.
Re: 72t - Break up IRA into 2 accounts?
My understanding is that once you hit zero you have no further obligation as long as you have correctly carried out the SEPPs until then. It's not so unlikely that the value of the account declines due to capital loss so that the last of the five year payments cannot be made in full and the account hits zero. The SEPP requirements only apply to the one IRA. You cannot satisfy them from another IRA.michaeljc70 wrote: ↑Sat Oct 23, 2021 5:50 pmI understand...and think you will have to pay the penalties if you hit zero and cannot take the required distriibutions. It seems very unlikely that would happen though. It would take really bad investments and/or timing. I don't know if continuing your distributions on another IRA is allowed.cbeck wrote: ↑Sat Oct 23, 2021 5:32 pmEven if you adhere to the required SEPPs your account may decline to zero before five years due to capital loss.michaeljc70 wrote: ↑Sat Oct 23, 2021 5:20 pmI cannot find definitive information on that other than that seems like an alteration as you are not taking the required SEPPs for the required time period.cbeck wrote: ↑Fri Oct 22, 2021 10:28 pm And the OP can divide his IRA repeatedly. So, one strategy to try to retain as much as possible in the IRA for the long term is to transfer enough for a five year period into the new IRA and then take SEPP payments from that account until the latter of reaching 59.5 years of age or five years. But also once the account is drawn down to zero you have no further obligation. Then if you still need additional funding, do the whole thing again for another five years.
I don't know if it is possible to have multiple 72t accounts simultaneously.
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Re: 72t - Break up IRA into 2 accounts?
If I put $100k into the 72t calculator, age 51, single life expectancy, the maximum withdrawal is around $3600/year. That is a total of 32,400. So, you would need to really have a bad sequence of returns to run out.cbeck wrote: ↑Sat Oct 23, 2021 5:54 pmMy understanding is that once you hit zero you have no further obligation as long as you have correctly carried out the SEPPs until then. It's not so unlikely that the value of the account declines due to capital loss so that the last of the five year payments cannot be made in full and the account hits zero. The SEPP requirements only apply to the one IRA. You cannot satisfy them from another IRA.michaeljc70 wrote: ↑Sat Oct 23, 2021 5:50 pmI understand...and think you will have to pay the penalties if you hit zero and cannot take the required distriibutions. It seems very unlikely that would happen though. It would take really bad investments and/or timing. I don't know if continuing your distributions on another IRA is allowed.cbeck wrote: ↑Sat Oct 23, 2021 5:32 pmEven if you adhere to the required SEPPs your account may decline to zero before five years due to capital loss.michaeljc70 wrote: ↑Sat Oct 23, 2021 5:20 pmI cannot find definitive information on that other than that seems like an alteration as you are not taking the required SEPPs for the required time period.cbeck wrote: ↑Fri Oct 22, 2021 10:28 pm And the OP can divide his IRA repeatedly. So, one strategy to try to retain as much as possible in the IRA for the long term is to transfer enough for a five year period into the new IRA and then take SEPP payments from that account until the latter of reaching 59.5 years of age or five years. But also once the account is drawn down to zero you have no further obligation. Then if you still need additional funding, do the whole thing again for another five years.
I don't know if it is possible to have multiple 72t accounts simultaneously.
If you put in age 55, the max is around $4k. Total withdrawal of $20k. So you'd need to lose 80k of 100k to run out of money.
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Re: 72t - Break up IRA into 2 accounts?
That used to be the case, but is no longer true:michaeljc70 wrote: ↑Sat Oct 23, 2021 5:50 pm I understand...and think you will have to pay the penalties if you hit zero and cannot take the required distributions.
https://www.irs.gov/retirement-plans/su ... payments#8
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Re: 72t - Break up IRA into 2 accounts?
Okay. Thanks for clarifying that.secondcor521 wrote: ↑Sat Oct 23, 2021 6:25 pmThat used to be the case, but is no longer true:michaeljc70 wrote: ↑Sat Oct 23, 2021 5:50 pm I understand...and think you will have to pay the penalties if you hit zero and cannot take the required distributions.
https://www.irs.gov/retirement-plans/su ... payments#8
That would be some bad luck though if that happens to you.
Re: 72t - Break up IRA into 2 accounts?
It's very rare, but more likely to happen if the 120% mid term rates are high when you start your plan. Once you are obligated to an annual distribution of around 6% or more and have a longer term plan such as 10 years, a bad bear market in the interim could possibly drain the account in the later stages. Even more likely if you invest in a few volatile stocks.
Of course, if the plan is busted due the IRA being drained, there is no penalty. There is also no penalty on distributions taken after 59.5, but if you have a 5 year plan and bust it after 59.5 you will still owe the penalty on the distributions taken prior to 59.5.
Of course, if the plan is busted due the IRA being drained, there is no penalty. There is also no penalty on distributions taken after 59.5, but if you have a 5 year plan and bust it after 59.5 you will still owe the penalty on the distributions taken prior to 59.5.
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Re: 72t - Break up IRA into 2 accounts?
OP, have you considered taking out a loan instead of doing a 72t? It might be in your best interest (forgive the unintended pun) to do so. Good luck.
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Re: 72t - Break up IRA into 2 accounts?
Yes. There are a few issues:TimeToThink wrote: ↑Sat Oct 23, 2021 10:44 pm OP, have you considered taking out a loan instead of doing a 72t? It might be in your best interest (forgive the unintended pun) to do so. Good luck.
-I am retired for 5 years and my spouse was unemployed for most of the last 18 months so I doubt we'd qualify for any mortgage or home equity loan.
-A mortgage (my home is paid for) wouldn't be ideal because I don't need a big sum now and would be paying interest on money I don't need yet. I could invest it and take market risk (but why?) or put it into something safe but that wouldn't cover the interest.
-A home equity loan would be better as I can take out X dollars per year. The problems with this (other than probably not qualifying) are you still have to make payments which requires more borrowing and this could snowball. The rates are typically variable too.
-In any type of loan, which I would need for 8 years of partial living expenses, at the end you don't want to pay it all off at once when you hit 59.5. I would have to make a big withdrawal and have a big tax hit. The longer you spread it out, the more interest you are paying.
I am certainly open to other analysis/opinions.
I have contemplated asking my parents to lend me $xx,000 every January and I make interest only payments until I am 59.5. They have the money and it is earning little to nothing so it could be mutually beneficial. I hate to ask though. I still have some income from capital gains and dividends and some small amounts left in my taxable account and Roth that can be taken out tax/penalty free. I only need around $25k a year.
I can probably make it 4 more years using up my taxable and usable Roth but then I would have no cushion or flexibility.
Though the 72t is pretty inflexible, doing it now when I have low income seems to make sense rather than having big RMDs when I am collecting SS and in a higher tax bracket.
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Re: 72t - Break up IRA into 2 accounts?
OP, it wouldn’t hurt to test the waters to see if you and your wife can qualify for a cash out refi based on your assets. Some legitimate underwriters are ok with lending to retirees. Also, while income is very low consider converting any trad ira funds u wouldn’t need to tap in 5 years to a Roth. There is no cap on the amount you convert at once. This period in your life may be the lowest tax liability you have. Might as well make lemonade with the lemons you are currently experiencing, right? Before going ahead with a Roth conversion please make sure you’re doing it correctly and that you will not need that money in less than 5 years. Otherwise Uncle Sam will want a being naughty cut.
When you fail. Tyson: Everyone has a plan till they get punched in the mouth. |
Be smart. Sgt. Esterhaus: Let's be careful out there. |
Act. Gretzky: You miss 100% of the shots you don’t take.