Lifetime Income Annuity and 72t

zinger1457 · 07-19-2008, 06:15 PM

Didn't want to hijack the other annuity thread so thought it would be best to start another one. I also realize many here have a very strong opinion about annuities, my intent is NOT to continue that discussion. I'm NOT looking for opinions if annuities are a good retirement tool or not, that's been beaten to death in the other thread.

I have looked at Vanguards Lifetime Income Annuity and see that they offer several withdrawal options, fixed, inflation adjusted, or a 1-5% graded option. Does anyone know if the inflation or graded adjustment choices meet the 72t requirements for 'substantially equal payments' to avoid the 10% penalty for early withdrawal from a qualified plan?

donheff · 07-20-2008, 07:04 AM

Fixed definitely meets the requirements. Inflation protected or graduating probably doesn't (IMHO). Read the IRS rules (section 2) and see how you interpret them:
http://www.irs.gov/pub/irs-irbs/irb02-42.pdf

zinger1457 · 07-21-2008, 03:33 PM

To answer my own question, I contacted the IRS about this and they stated that the inflation adjusted and graded (1-5%) options would meet the 'substantially equal payments' requirement and avoid the 10% penalty. The key is that the payment plan is set up at the beginning, cannot be changed until 59.5, and is based on life expectancy. The IRS also suggest that I check with the annuity company (Vanguard) on how the 1099R would be filled out. If block 7 on the 1099 shows code 2 this indicated that one of the early withdrawal exception applies. I checked with Vanguard and they confirmed that code 2 wold be used for any of these withdrawal options.

Steve O · 07-21-2008, 04:41 PM

Very interesting, I will be going through the same thing you are soon

So what are you all that are ER'd doing about 72t

CyclingInvestor · 07-21-2008, 06:41 PM

I am 49, retired for 2 years, with 90+% of my savings in IRAs.

I am taking annual recalc 72t withdrawals (so about 3%) from my 'big' IRA. It is 100% invested in individual dividend paying stocks (GE, PG, JNJ, ITW, KIM, KO, MMM, etc). These generate more than enough dividends to cover the annual withdrawal.

07-19-2008, 06:15 PM	#1
zinger1457 Confused about dryer sheets Join Date: Jul 2007 Posts: 4	Lifetime Income Annuity and 72t Didn't want to hijack the other annuity thread so thought it would be best to start another one. I also realize many here have a very strong opinion about annuities, my intent is NOT to continue that discussion. I'm NOT looking for opinions if annuities are a good retirement tool or not, that's been beaten to death in the other thread. I have looked at Vanguards Lifetime Income Annuity and see that they offer several withdrawal options, fixed, inflation adjusted, or a 1-5% graded option. Does anyone know if the inflation or graded adjustment choices meet the 72t requirements for 'substantially equal payments' to avoid the 10% penalty for early withdrawal from a qualified plan?

07-20-2008, 07:04 AM	#2
donheff Thinks s/he gets paid by the post Join Date: Feb 2006 Posts: 2,371	Fixed definitely meets the requirements. Inflation protected or graduating probably doesn't (IMHO). Read the IRS rules (section 2) and see how you interpret them: http://www.irs.gov/pub/irs-irbs/irb02-42.pdf __________________ Every man is, or hopes to be, an Idler. -- Samuel Johnson

07-21-2008, 06:41 PM	#5
CyclingInvestor Full time employment: Posting here. Join Date: Jul 2005 Location: Los Angeles area Posts: 753	I am 49, retired for 2 years, with 90+% of my savings in IRAs. I am taking annual recalc 72t withdrawals (so about 3%) from my 'big' IRA. It is 100% invested in individual dividend paying stocks (GE, PG, JNJ, ITW, KIM, KO, MMM, etc). These generate more than enough dividends to cover the annual withdrawal. __________________ learn, work, save, invest, fire

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07-21-2008, 03:33 PM	#3
zinger1457 Confused about dryer sheets Join Date: Jul 2007 Posts: 4	To answer my own question, I contacted the IRS about this and they stated that the inflation adjusted and graded (1-5%) options would meet the 'substantially equal payments' requirement and avoid the 10% penalty. The key is that the payment plan is set up at the beginning, cannot be changed until 59.5, and is based on life expectancy. The IRS also suggest that I check with the annuity company (Vanguard) on how the 1099R would be filled out. If block 7 on the 1099 shows code 2 this indicated that one of the early withdrawal exception applies. I checked with Vanguard and they confirmed that code 2 wold be used for any of these withdrawal options.

07-21-2008, 04:41 PM	#4
Steve O Dryer sheet aficionado Join Date: Dec 2007 Posts: 26	Very interesting, I will be going through the same thing you are soon So what are you all that are ER'd doing about 72t

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