72T experience

[Stormy Kromer]

I have an old annuity that I will be vested in when I turn 58. I'd like to turn on the guaranteed benefit as soon as possible, 4% of guaranteed life income amount. I don't want to wait til I'm 59 1/2 and lose 2 years of zero net performance.

Could I start rolling the 4% benefit directly into another traditional IRA for two years and avoid the 10% penalty ?

Or, would I need to turn on the benefits and use 72T to draw the funds, this would also avoid the 10% penalty, but of course it would be taxable income. I would add it to my taxable accounts per my current allocation. Is 72T a headache ?

I don't plan on using these funds for living expense until I'm 65.

The reason I'm not leaving the money in the annuity til I'm 65 is that the sub accounts are much lower than the guaranteed income amount and there is no way it will catch up in those 7 years. (that is another story) If I could start the 4% payout as soon as I'm vested and put it in my IRA I'll get 7 years of growth that wouldn't happen in the annuity.

I'm just trying to figure out my options while I've 3 years to get ready. Thank you.

 

[Jerry1]

Just do the 72T. It’s easy. Just a simple form on your taxes. For me, it was a box to check in Turbo Tax.

I don’t think there’s any way you can roll it into an IRA so you don’t pay taxes on it.

 

[frayne]

I did a 72T back in 2007 and my only advice is to do your homework first. It wasn't difficult but if you violate any rules for the 72T, it has the potential of being expensive.

 

[chassis]

I'm glad the 72t topic came up, thanks Stormy.

I would appreciate any comments on why the decision was reached to take a 72t. I am considering this and want to be sure I am evaluating correctly.

@frayne
@Jerry1
@Stormy Kromer

 

[Jerry1]

I did a 72T back in 2007 and my only advice is to do your homework first. It wasn't difficult but if you violate any rules for the 72T, it has the potential of being expensive.

True, but the annuity makes this almost fool proof. Plus, he won’t vest until he’s 58 so he’ll only be on it for 1-1/2 years.

 

[CyclingInvestor]

True, but the annuity makes this almost fool proof. Plus, he won’t vest until he’s 58 so he’ll only be on it for 1-1/2 years.

You are on 72t withdrawals for at least 5 years once you start it, regardless of age.

"The substantially equal period payments must generally continue for at least five full years, or if later, until age 59 ½. For example, if you began taking payments at age 56 on December 1, 2006, you may not take a different distribution or alter the amount of the payment until December 1, 2011, even though your fifth payment was taken on December 1, 2010.

If you begin taking substantially equal periodic payments on December 1, 2005, and you turn 59 ½ on July 1, 2011, you may not take a different distribution or alter the amount of the payment until July 1, 2011."

 

[Sunset]

True, but the annuity makes this almost fool proof. Plus, he won’t vest until he’s 58 so he’ll only be on it for 1-1/2 years.

"The payments must continue for at least five years or until you are age 59 ½, whichever period is longer."

https://www.irahelp.com/slottreport... 1,you become disabled or die. More items...

 

[Jerry1]

You are on 72t withdrawals for at least 5 years once you start it, regardless of age.

"The substantially equal period payments must generally continue for at least five full years, or if later, until age 59 ½. For example, if you began taking payments at age 56 on December 1, 2006, you may not take a different distribution or alter the amount of the payment until December 1, 2011, even though your fifth payment was taken on December 1, 2010.

If you begin taking substantially equal periodic payments on December 1, 2005, and you turn 59 ½ on July 1, 2011, you may not take a different distribution or alter the amount of the payment until July 1, 2011."

Form over substance. Doesn’t matter in the OP’s case since he’ll be doing it through an annuity. He’ll be taking equal payments for the rest of his life.

 

[Stormy Kromer]

Form over substance. Doesn’t matter in the OP’s case since he’ll be doing it through an annuity. He’ll be taking equal payments for the rest of his life.

That's right. I just don't want to have a 10% penalty for the two years prior to turning 59 1/2. There would be equal payments for life starting at age 58 so the 5 year 72T requirement would not be a burden.

I have heard horror stories of 72T's not being done correctly, I would hope the annuity custodian would avoid this.

Preferably, I would like to have the income stream paid directly to my IRA custodian for my benefit, similar to a rollover, for the first 7 years. Then at age 65 I would use the annuity to supplement retirement income. (The IRA too).


I should also mention that this annuity is inside a qualified plan, that may make a difference.

 

[Jerry1]

I admit to being casual with my response, but I did the same thing as the
OP, took an annuity before 59-1/2. Since you sign up for payments that are for the rest of your life, the annuity makes the payment rules basically irrelevant. Said another way, they meet the requirements for the T72 program. So, simple and no need to worry.

I guess if there’s a cash balance at death, or some form of early withdrawal provision, those might require a bit of research before taking a withdrawal or filing a final tax return, but I think that’s beyond the immediate concern of the OP.

 

[Jerry1]

Preferably, I would like to have the income stream paid directly to my IRA custodian for my benefit, similar to a rollover, for the first 7 years. Then at age 65 I would use the annuity to supplement retirement income. (The IRA too).


I should also mention that this annuity is inside a qualified plan, that may make a difference.

I don’t think there’s any way to roll it over to your IRA to avoid income tax. Others may have an idea on that. My annuity was an IRA. I rolled a 401k into it. Maybe you can talk to the administrator and see if the entire balance can be rolled into your IRA?

 

[Stormy Kromer]

Thanks everyone for your responses. I think my situation is more clear than I thought.


I guess my question boils down to this.


If I start drawing 4% from the annuity in my qualified plan at age 58, can I have the annuity custodian make the payment directly to my IRA custodian for my benefit, similar to a rollover ? I want to avoid the 10% penalty and keep it tax deferred. The annuity is in a qualified retirement plan so it would be from one plan directly to another.


This way the funds would to into my IRA and I could let it grow until I wanted to draw it or RMD time.

 

[cathy63]

Thanks everyone for your responses. I think my situation is more clear than I thought.


I guess my question boils down to this.


If I start drawing 4% from the annuity in my qualified plan at age 58, can I have the annuity custodian make the payment directly to my IRA custodian for my benefit, similar to a rollover ? I want to avoid the 10% penalty and keep it tax deferred. The annuity is in a qualified retirement plan so it would be from one plan directly to another.


This way the funds would to into my IRA and I could let it grow until I wanted to draw it or RMD time.

It depends on the rules of the qualified retirement plan that holds the annuity. The only people who can answer this for you are the custodians of that plan.

 

[frayne]

True, but the annuity makes this almost fool proof. Plus, he won’t vest until he’s 58 so he’ll only be on it for 1-1/2 years.

If I have learned anything in my 70 years, there is nothing almost fool proof.

 

[mckittri2000]

One extra form for taxes for the SEPP payments. There are plenty of websites online to help you with the calculations. We attach a copy of the calculation sheet with our taxes.

 

[zinger1457]

The 72t rules were setup to allow a needed 'income stream' that was penalty free from retirement accounts, you would not be able to rollover 72t distributions to another IRA or converted them to a Roth. Does your annuity offer a lump sum option? Might be able to roll that over to an IRA.

 

[Stormy Kromer]

Its looking like I can take turn on the guaranteed living benefits amount (whatever the terminology is) when I turn 58. About $48K annually. It is a qualified SEP IRA.


It's looking like I can have them turn this on if I do a rollover to another IRA. I've got one in place at VG. I'll just have the existing plan roll it over and put it in my IRA each year and let it grow til I planned on taking it out at 65. I know I have to pay income tax someday and that is only right. I only wanted to avoid the 10% penalty.


I will roll the annuity guaranteed amount into my IRA and let it grow for 7 years and start the withdrawals.


I started saving this money when I was 19. It does me good to know it's paying off now.


Thanks all my ER friends.

 

[zinger1457]

Its looking like I can take turn on the guaranteed living benefits amount (whatever the terminology is) when I turn 58. About $48K annually. It is a qualified SEP IRA.

It's looking like I can have them turn this on if I do a rollover to another IRA. I've got one in place at VG. I'll just have the existing plan roll it over and put it in my IRA each year and let it grow til I planned on taking it out at 65. I know I have to pay income tax someday and that is only right. I only wanted to avoid the 10% penalty.
.

Is that $48K annual distribution considered part of a series of payments made over your life expectancy? What I read from the IRS is those types of distributions can't be rolled over. https://www.irs.gov/taxtopics/tc413 Topic No. 413 Rollovers from Retirement Plans

Ineligible Distributions
Certain distributions from an eligible retirement plan can't be rolled over, including:

1. Generally, the nontaxable part of a distribution, such as your after-tax contributions to a retirement plan,
2. A distribution that's one of a series of payments made for your life (or life expectancy), or the joint lives (or joint life expectancies) of you and your beneficiary, or made for a specified period of 10 years or more,
3. A required minimum distribution,
4. A hardship distribution,
5. Dividends paid on employer securities, or
6. The cost of life insurance coverage.