Early IRA withdrawals & 72t

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gassert
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Early IRA withdrawals & 72t

Post by gassert »

I have googled this but can't find the answer.

I understand it's possible to draw retirement funds prior to 59.5 in a few cases. One method uses 72t which must continue for 5 years or 59.5 whichever is later. And I also understand there are a couple ways to calculate the distriution amount. There are plenty of calculators online.

What I don't know is if a fixed period annuity payout would satisfy the 72t exception and avoid the 10% penalty. For ex, take someone who's 50 with $100k in an IRA, purchase a fixed period annuity which pays, let say $1000/mo by definition for 10 years (ending at age 60). Because the annuity renders the account balance $0 at the start and the payments are identical year over year - I don't know if this satisfies early withdrawals under 72t.

Any thoughts??

Thanks!
GG
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LH2004
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Post by LH2004 »

Yes, that would avoid the sec. 72(t) penalty.
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gassert
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Post by gassert »

LH - thanks. I take your posts as virtual truth, but how do you know that? I can't find language.
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LH2004
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Post by LH2004 »

Maybe I'm missing something, but it doesn't sound like a close question.

Are you looking for the details of the rule itself? Sec. 72(t)(2)(iv) creates the exception for "a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary." Then, sec. 72(t)(4)(A) says that you lose that benefit if the payments are modified, but only if the modification occurs, other than by reason of death or disability, before age 59 1/2, or, if after age 59 1/2, before 5 years from the date of the first payment in the series; if you want the payments to stop after 10 years, you're basically starting a life annuity and "modifying" it to be zero after 10 years.
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gassert
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Post by gassert »

But,

If Im 50 ys old and start a life annuity on $100k, my monthly payment would be - say $300/mo. If I'm 50 and start a fixed period annuity for 10 years, then the payment would be - say $1,000/mo.

I read the language and "made for the life (or life expectancy) " is what I'm trying to clarify. Becuase a fixed period annuity is drawing at a much faster rate then if we were talking about a withdrawl based on life expectancy.

Youre probbaly not missing something, Im probably just misreading the language.
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LH2004
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Post by LH2004 »

Ah. Yes. The amount of the withdrawal can't be more than the amount you calculate under one of the 3 IRS-approved methods, or some other method that basically gives you 10 years' worth of payments that would be substantially equal for life. It's fine to take those payments through a fixed annuity, but if you use your entire IRA to buy a 10-year period certain annuity, the payments will probably be too large to justify.
Eureka
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Post by Eureka »

Here's a link to an excellent forum on IRC Rule 72(t). Several CPAs participate here, and one has written what may be the only comprehensive book on substantially equal periodic payments:

http://72t.net/Default.aspx
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HueyLD
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Post by HueyLD »

LH2004,

I have spent a few hours reading Sec 72(t), etc., but I simply could not find any official reference that would allow the OP to escape the 10% penalty under his scenario. All three IRS-approved methods require one to use some-sort of life expectancy table. And age 60 doesn't appear to be the life expectancy for a 50-year old man.

Would you please provide additional guidance on this issue? Thank you very much for your time and assistance.

Regards,
HueyLD
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gassert
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Post by gassert »

Thanks - I'm pretty clear on the issue.

It sounds like I could use the fixed period annuity, but it would have to be set up perfectly at the start and may be easier to use the other calculation methods each year.

So, if the IRA is $100,000, and the 72t calc basd on LE is - say $3,500, then I'd have to annuitize the perfect amount - Say $30,000 of the total IRA to pay out just $3,500 per yr for 10 yrs. Probably not ideal.
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LH2004
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Post by LH2004 »

HueyLD wrote:I have spent a few hours reading Sec 72(t), etc., but I simply could not find any official reference that would allow the OP to escape the 10% penalty under his scenario. All three IRS-approved methods require one to use some-sort of life expectancy table. And age 60 doesn't appear to be the life expectancy for a 50-year old man.

Would you please provide additional guidance on this issue?
You do need to calculate your withdrawals to last your entire life. You can use the methods the IRS has approved, one of which is a fixed annual payment based on a reasonable mortality table and reasonable interest rate; it's likely that you can get away with using a somewhat out-of-date mortality table, to increase the payments somewhat.

It's easy if you want to take a lower amount; you just have to split your IRA so that one piece of it has the calculated withdrawals in the amount you want. You don't have to actually take the withdrawals from the IRA that you used to calculate the withdrawals -- like with RMD's, any withdrawals count. So, if, say, the fixed payment calculation comes to 5% of the IRA balance, and you only want to take 2%, just put 40% of your IRA in a separate IRA and calculate the withdrawals from that IRA.

It doesn't matter how you actually fund the withdrawals. If the calculated amount was $3500 a year, you could buy an annuity that paid that amount for a shorter period, if you wanted.

You're allowed to modify the payments after age 59 1/2 and after the fifth anniversary, so a 50 year old could stop the payments at age 60.
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HueyLD
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Post by HueyLD »

Thank you LH2004 for an insightful explanation.
Hershey102
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Post by Hershey102 »

"You can use the methods the IRS has approved, one of which is a fixed annual payment based on a reasonable mortality table and reasonable interest rate."

More accurately, the interest rate that may be used is any interest rate that is not more than 120 percent of the federal mid-term rate for either of the two months immediately preceding the month in which the distribution begins.
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