Mechanics of 72t IRA distributions

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michaeljc70
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Mechanics of 72t IRA distributions

Post by michaeljc70 »

I am probably going to start taking 72t distributions from my IRA in the near future. I looked at the form from TDA (where my IRA is) and I can take the distribution monthly, quarterly, semi-annual or annually. My question is, there doesn't seem to be a mechanism for the distribution to be tied to the sale of a security. Do other brokerages offer this? It says if there isn't enough cash in the account my distribution won't be made. Not that it is a big thing to manually do the sale, but I probably don't want to do that monthly. I would probably go with quarterly or another broker if they offer an automatic sale option. I have a 3 fund ETF portfolio.
mkc
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Re: Mechanics of 72t IRA distributions

Post by mkc »

michaeljc70 wrote: Mon Jun 14, 2021 8:41 am I am probably going to start taking 72t distributions from my IRA in the near future. I looked at the form from TDA (where my IRA is) and I can take the distribution monthly, quarterly, semi-annual or annually. My question is, there doesn't seem to be a mechanism for the distribution to be tied to the sale of a security. Do other brokerages offer this? It says if there isn't enough cash in the account my distribution won't be made. Not that it is a big thing to manually do the sale, but I probably don't want to do that monthly. I would probably go with quarterly or another broker if they offer an automatic sale option.
From experience with my mother's IRA and RMDs at Vanguard, I left everything in funds (no cash in settlement) and was able to set up monthly distribution which would cause the sale of the appropriate number of shares to cover. I was able to set a percentage for where the sales should occur (roughly 1/3 of the RMD from 1 holding and 2/3 from the other in her 2-fund portfolio) and that was the ratio of the sales to cover the RMD.
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retiredjg
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Re: Mechanics of 72t IRA distributions

Post by retiredjg »

michaeljc70 wrote: Mon Jun 14, 2021 8:41 am I am probably going to start taking 72t distributions from my IRA in the near future. I looked at the form from TDA (where my IRA is) and I can take the distribution monthly, quarterly, semi-annual or annually. My question is, there doesn't seem to be a mechanism for the distribution to be tied to the sale of a security. Do other brokerages offer this? It says if there isn't enough cash in the account my distribution won't be made. Not that it is a big thing to manually do the sale, but I probably don't want to do that monthly. I would probably go with quarterly or another broker if they offer an automatic sale option. I have a 3 fund ETF portfolio.
I think you are saying you have to keep enough cash (such as a money market fund) in the IRA for them to make the distribution....regardless of the value of the IRA account.

This seems troubling to me - this is the kind of thing that could be forgotten or overlooked (especially as we age) or not done timely during a time of illness or other unplanned event. And that could cause you to "bust" your 72t which I've heard is quite expensive in terms of tax and fees.

It might be troubling enough to me to move the IRA. If I were going to use a 72t SEPP arrangement, I'd want it to be as close to bullet proof as possible.
Alan S.
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Re: Mechanics of 72t IRA distributions

Post by Alan S. »

michaeljc70 wrote: Mon Jun 14, 2021 8:41 am I am probably going to start taking 72t distributions from my IRA in the near future. I looked at the form from TDA (where my IRA is) and I can take the distribution monthly, quarterly, semi-annual or annually. My question is, there doesn't seem to be a mechanism for the distribution to be tied to the sale of a security. Do other brokerages offer this? It says if there isn't enough cash in the account my distribution won't be made. Not that it is a big thing to manually do the sale, but I probably don't want to do that monthly. I would probably go with quarterly or another broker if they offer an automatic sale option. I have a 3 fund ETF portfolio.
Yes, you should resolve this before starting the plan, since transfers or rollovers after the first 72t distribution are not advisable since they add risk of execution error. Even when you do resolve this issue, I think you should limit your annual distributions to a quarterly frequency, and if you set them up automatically, the best months for distributions are Feb, May, August and Nov. That keeps you away from any distributions near year end or beginning, and gives you plenty of time after the Nov distribution to add up the 4 distributions to make sure the total is correct. If not, you have time to take another distribution if you are short or roll back some of the Nov distribution if you are over.

Of course, you would also want to avoid distributing in kind, because you would then have to sell in taxable and report a gain or loss for each sale 4 times a year. That would be unnecessary work.

I wonder how Schwab is coming with absorbing the TDA business. I expect that Schwab would offer this service, which would be basically the same as used by many for RMDs.
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michaeljc70
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Re: Mechanics of 72t IRA distributions

Post by michaeljc70 »

Alan S. wrote: Mon Jun 14, 2021 4:25 pm
michaeljc70 wrote: Mon Jun 14, 2021 8:41 am I am probably going to start taking 72t distributions from my IRA in the near future. I looked at the form from TDA (where my IRA is) and I can take the distribution monthly, quarterly, semi-annual or annually. My question is, there doesn't seem to be a mechanism for the distribution to be tied to the sale of a security. Do other brokerages offer this? It says if there isn't enough cash in the account my distribution won't be made. Not that it is a big thing to manually do the sale, but I probably don't want to do that monthly. I would probably go with quarterly or another broker if they offer an automatic sale option. I have a 3 fund ETF portfolio.
Yes, you should resolve this before starting the plan, since transfers or rollovers after the first 72t distribution are not advisable since they add risk of execution error. Even when you do resolve this issue, I think you should limit your annual distributions to a quarterly frequency, and if you set them up automatically, the best months for distributions are Feb, May, August and Nov. That keeps you away from any distributions near year end or beginning, and gives you plenty of time after the Nov distribution to add up the 4 distributions to make sure the total is correct. If not, you have time to take another distribution if you are short or roll back some of the Nov distribution if you are over.

Of course, you would also want to avoid distributing in kind, because you would then have to sell in taxable and report a gain or loss for each sale 4 times a year. That would be unnecessary work.

I wonder how Schwab is coming with absorbing the TDA business. I expect that Schwab would offer this service, which would be basically the same as used by many for RMDs.
Thanks. That is good advice.

I looked at TDA and Schwab's forms and neither allows for the sale of securities as far as I can tell except TDA at a fixed number of shares per period. There may be options available online not available on the form (but I doubt it). I read that the switch over could take up to 1 1/2 years. Schwab lets you get your cash balance, mm balance, dividends and/or interest but I don't see the option to get $X selling security A,B,C in 1/3, 1/3, 1/3 proportions or anything like that.

I also don't know if a company offers it for RMDs they will automatically offer it for 72ts.
rgs92
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Re: Mechanics of 72t IRA distributions

Post by rgs92 »

In case you are interested, a simpler way is to use some of your IRA money to buy an SPIA (single premium fixed annuity) within the IRA's custodian family, such as Fidelity or Vanguard.

The payout each month will be given to you in a taxable account (from which you can choose any amount for federal or state withholding).
There will be no 10% penalty since this automatically qualifies under 72t regulations.

You may want to use your fixed-income allocation for this, but allocation is personal, of course, and another subject for another thread.

If your custodian does not provide SPIAs, you can just start by doing an easy transfer to someone who does, again, like Fidelity or Vanguard or I believe any provider that has them (but ask first).

This can be done at any age (as that is the whole point of a 72t distribution plan).
Alan S.
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Re: Mechanics of 72t IRA distributions

Post by Alan S. »

rgs92 wrote: Mon Jun 14, 2021 4:53 pm In case you are interested, a simpler way is to use some of your IRA money to buy an SPIA (single premium fixed annuity) within the IRA's custodian family, such as Fidelity or Vanguard.

The payout each month will be given to you in a taxable account (from which you can choose any amount for federal or state withholding).
There will be no 10% penalty since this automatically qualifies under 72t regulations.

You may want to use your fixed-income allocation for this, but allocation is personal, of course, and another subject for another thread.

If your custodian does not provide SPIAs, you can just start by doing an easy transfer to someone who does, again, like Fidelity or Vanguard or I believe any provider that has them (but ask first).

This can be done at any age (as that is the whole point of a 72t distribution plan).
This is not correct.
An IRA SPIA payout is not calculated using one of the 3 approved methods for a 72t plan described in RR 2002-62 (fixed amortization, fixed annuitization or RMD methods), and it must be to qualify for the 72t penalty exception. See p 3 of the RR here: https://www.irs.gov/pub/irs-drop/rr-02-62.pdf

However, a NQ SPIA meeting the definition of "immediate annuity" in Sec 72(q)(2)(I) will qualify for the penalty waiver regardless of how calculated, so the insurance company can use their own mortality calculations. This exception does not apply to qualified annuities including IRA annuities, just for NQ annuities.

An IRA 72t plan must only continue for the longer of 5 years or age 59.5, whichever is longer, and then the plan automatically terminates. Most taxpayers do not want these inflexible payments to continue any longer then necessary.
jwfails
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Re: Mechanics of 72t IRA distributions

Post by jwfails »

I set up my 72-T with the assistance of a Vanguard rep. I called them and let them know I wanted to start a 72-T. I set mine up to have a yearly payment disbursed from my IRA Total Bond fund every January in a single payment. I am on year 3 now and have not had any problems. You will have to submit IRS from 5329, (I believe that is the right #), with your 1099. You can not stop distributions before 5 years or age 59 1/2.
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