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72t journey, first steps
Old 05-24-2022, 09:10 AM   #1
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72t journey, first steps

Decided to make a new, hopefully none cluttered thread about our personal need for a 72t during our retirement.

Background: Initially, I was going to do a Roth ladder but we had some big capital gain years in taxable during our first few years of retirement and I didn't convert as much to Roth as I had planned because of the higher tax bracket.

We have had a bigger drawdown of taxable than planned because of the increase in costs in building a house (even though we are doing all labor, it is just ridiculously expensive now to build). We could try and get some of the money back out of the house but I rather like the idea of a steady stream of income from our 401K (plus maybe it provides a source of income for banks if we ever do need a loan).

Our 401k has grown a lot, and I have $300,000 of it in cash (some lucky market timing of the recent crash....was planning on moving it to bonds when I shifted it a few months ago but never got around to it).

So, according to the calculators, if we set up a 72t with $300,000, we could get a payment of about $19,000 per year. This would be below ACA income level for the best cost sharing subsidy but we could do conversions on other accounts to get up to the ~$25,000 taxable income level needed. If we set it up with $400,000, we could get a payment of about $25,000 per year (we are age 53 (primary) and 52). We have enough taxable money left (unless sheetrock goes to $300 a piece) to supplement that income to what we spend each year until age 59.5. Worst case we can also do a heloc once our home is finished, or sell some timberland we own.

First questions:

1) When do we need to do this if we want the first $25,000 to come for this current tax year?

2) Can you switch from an annual lump sum payment to monthly installments (monthly might be better for the silly banks to think you have stable income?)

3) Do we just direct Fidelity to split off $400,000 from our 401K into a IRA and then set up the 72t on the IRA?
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Old 05-24-2022, 10:32 AM   #2
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1. In this current tax year.
2. Yes, the IRS just looks at the dollar amount for the year. AFAIK the dollar amount must be exactly the same each year, except for a one time change in method.

The previous version of Bill Steckers book was excellent. I'd share the info to get the new version. https://www.72tcalc.com

And good resources are here https://72tnet.com

I wrote about my decision and implementation here https://www.early-retirement.org/for...an-111263.html
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Old 05-24-2022, 10:39 AM   #3
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How do you get these withdrawal amounts? I thought the new more generous interest rate was 5% max.

EDIT: Never mind. I totally misunderstood how the max interest rate is included in the distribution formula
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Old 05-25-2022, 07:46 AM   #4
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Thanks for the links, I had missed one of those! Perusing it now and will get back with results/decisions.
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Old 09-20-2022, 08:32 AM   #5
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Another quick question on this 72T.

If any of you have done this, how long did it take to set up? In other words, what is the most I can procrastinate this year and still have a lump sum delivered that counts in 2022?
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Old 09-20-2022, 08:47 AM   #6
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3) Do we just direct Fidelity to split off $400,000 from our 401K into a IRA and then set up the 72t on the IRA?
Yes, I did exactly that. My recollection is, it took less than 1 week. Start in early December. You can stack the deck by setting up where the $ are to go beforehand. IIRC, they do one or two test transactions.
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Old 09-20-2022, 09:09 AM   #7
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2. Yes, the IRS just looks at the dollar amount for the year. AFAIK the dollar amount must be exactly the same each year, except for a one time change in method.
This is true if the OP uses the annuity or amortization method. But if the OP uses the RMD method, they will need to recalculate the amount annually in a manner similar to regular age-72+ RMDs.

Also, one can only switch one time, and only from the annuity or amortization method to the RMD method.
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Old 09-21-2022, 09:42 AM   #8
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So if I moved $400,000 from a 401K into a IRA and set up a 72t on it....do people usually just allocate their same 60/40, 50/50 whatever on that money or should preservation be the key and I should attempt to purchase tips with that money (I am unsure if Fidelity lets you buy tips in a IRA)
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Old 09-21-2022, 10:48 AM   #9
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So if I moved $400,000 from a 401K into a IRA and set up a 72t on it....do people usually just allocate their same 60/40, 50/50 whatever on that money or should preservation be the key and I should attempt to purchase tips with that money (I am unsure if Fidelity lets you buy tips in a IRA)
It used to be a problem if the money in the 72(t) IRA ran out prematurely, because that would break the 72(t) and result in penalties.

I'm fairly but not 100% sure that the IRS changed that rule such that now, if you run out, well, you run out of money but no penalty.

If you're choosing the amortization or annuity method, you have some flexibility because of the interest rate. If your original plan was $400K and a 5% rate and annuity/amortization resulted in the $25K amount you wanted, then lowering the rate to 3% and keeping the $25K payment the same might require $600K. The point here is that $600K isn't as likely to run out, so you can allocate it more or less as you like.

(Also, the point is it seems you can choose any interest rate now between 80% of mid-term AFR and 5%.)

...

My plan - I think I'm in a sort of similar situation, although I'm single and it sounds like for me the 72(t) is more optional and I'm not sure of your age - is to split off about $390K, use an interest rate of 5%, and amortization method to get an annual payment of $24K. I will probably keep my small bond allocation in the 72(t) side of things to lower the volatility.

I like the $24K number because it divides evenly to a monthly payment of $2K, and also seems to be the optimal point for tax reasons for my situation. What I haven't considered is that I want my "72(t) tax year" to start on December 4th since that minimizes my SEPP period, but I don't know if the IRS will get heartburn if my five years of SEPP distributions are $2K / $24K / $24K / $24K / $22K starting in December 2023 and ending November 2028. I may just do annual distributions to make it simple.

The remainder of my IRA can be used for optional Roth conversions if I want a higher taxable income for whatever reason.

I want to use the highest interest rate and method consistent with my target annual payment, because there is a chance that during my 72(t) period, I won't need the money as much. If that happens, I can switch to the RMD method to lower the payment, and in that case having a lower account balance helps lower the payment also.

My plan is to start it at age 54.5 and end at 59.5+1 day. At 59.5+1 day, I'll stop the SEPP and recombine the two parts of my IRA back into one.
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Old 09-21-2022, 11:37 AM   #10
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It used to be a problem if the money in the 72(t) IRA ran out prematurely, because that would break the 72(t) and result in penalties.

I'm fairly but not 100% sure that the IRS changed that rule such that now, if you run out, well, you run out of money but no penalty.

If you're choosing the amortization or annuity method, you have some flexibility because of the interest rate. If your original plan was $400K and a 5% rate and annuity/amortization resulted in the $25K amount you wanted, then lowering the rate to 3% and keeping the $25K payment the same might require $600K. The point here is that $600K isn't as likely to run out, so you can allocate it more or less as you like.

(Also, the point is it seems you can choose any interest rate now between 80% of mid-term AFR and 5%.)

...

My plan - I think I'm in a sort of similar situation, although I'm single and it sounds like for me the 72(t) is more optional and I'm not sure of your age - is to split off about $390K, use an interest rate of 5%, and amortization method to get an annual payment of $24K. I will probably keep my small bond allocation in the 72(t) side of things to lower the volatility.

I like the $24K number because it divides evenly to a monthly payment of $2K, and also seems to be the optimal point for tax reasons for my situation. What I haven't considered is that I want my "72(t) tax year" to start on December 4th since that minimizes my SEPP period, but I don't know if the IRS will get heartburn if my five years of SEPP distributions are $2K / $24K / $24K / $24K / $22K starting in December 2023 and ending November 2028. I may just do annual distributions to make it simple.

The remainder of my IRA can be used for optional Roth conversions if I want a higher taxable income for whatever reason.

I want to use the highest interest rate and method consistent with my target annual payment, because there is a chance that during my 72(t) period, I won't need the money as much. If that happens, I can switch to the RMD method to lower the payment, and in that case having a lower account balance helps lower the payment also.

My plan is to start it at age 54.5 and end at 59.5+1 day. At 59.5+1 day, I'll stop the SEPP and recombine the two parts of my IRA back into one.

You keeping your total amount spent below the

$51,520 - 400% FPL -- ACA subsidy reduced to the point where premium can be 8.5% of income (household of 1, Lower 48)

?? Is that why you want to have a low withdraw amount ? I am in the same situation as you and am following all of these 72t threads.
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Old 09-21-2022, 11:40 AM   #11
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Decided to make a new, hopefully none cluttered thread about our personal need for a 72t during our retirement.
There used to be a website called www.72t.net, or something like that. Have you checked/Googled that? Be careful, lots of fake scam sites these days. I see the website redirects to https://spintwig.com/fire-taxes/#72t_SEPP now.
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Old 09-21-2022, 11:49 AM   #12
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I did a 72t from when I retired in 2006 until I hit 59.5 in 2018 using the annual recalc method (1 small excel spreadsheet) on my "big" IRA with 80% of my assets, keeping a small IRA (10%) aside for emergencies since penalties for breaking a 72t are high.

I did not change my asset allocation (100% equities) as the dividends covered the withdrawals.

The 72t.net website was very helpful at raising my comfort in doing this. Since my IRAs were already split, it took no time at all to initiate it. Schwab was able to answer what few questions I had.

Everything went very smoothly.
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Old 09-21-2022, 12:08 PM   #13
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You keeping your total amount spent below the

$51,520 - 400% FPL -- ACA subsidy reduced to the point where premium can be 8.5% of income (household of 1, Lower 48)

?? Is that why you want to have a low withdraw amount ? I am in the same situation as you and am following all of these 72t threads.
[OP, if you feel this is cluttering your thread, please let me know and I'll ask the mods to split this out into its own thread.]

That's one kind of limit to consider. Another AGI limit that I pay attention to is some of the FAFSA limits since I have two kids in college.

More generally, a 72(t) locks you in to at least 5 years of withdrawals which are treated as ordinary income. This means that the 72(t) becomes a floor: I can fairly easily raise my taxable income higher (by Roth conversions or other means), but lowering it would be more difficult for me.

In my case, $24K seems to be about the lowest amount that I am confident that I will be able to use each year during my 5 year SEPP timeframe. I only want to lock myself in to income that I know I'll be able to use and is a good idea to realize for tax purposes. I think I'll spend at least that much, and I think my target AGI for each of those 5 years will be at least that much.
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Old 09-21-2022, 01:40 PM   #14
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I am currently in the process of moving some money to a Vanguard IRA from a T.Rowe Price 401k. They required a check be sent via mail to my home address (made out to Vanguard) which I will then need to forward on via mail. This process will probably take a couple weeks.
Not sure yet if I will start a 72t as I am still working through the pros and cons primary the ACA considerations. For now wanted to move the money so I could put it in treasuries instead of stable value fund.
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Old 09-21-2022, 05:44 PM   #15
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I like the $24K number because it divides evenly to a monthly payment of $2K, and also seems to be the optimal point for tax reasons for my situation. What I haven't considered is that I want my "72(t) tax year" to start on December 4th since that minimizes my SEPP period, but I don't know if the IRS will get heartburn if my five years of SEPP distributions are $2K / $24K / $24K / $24K / $22K starting in December 2023 and ending November 2028. I may just do annual distributions to make it simple.
Wait, I may be confused about how things work now. I thought you could willy nilly choose to take distributions monthly or annually as long as you take out the same amount each year. I rather thought it was a tax year and not a 72(t) year though? Like if I set up our 72t in November or December, I was planning on taking out $25,000 as a lump sum this year and then maybe in Jan change it to taking out $2,083.33 every month of 2023. Is there a problem with this?

Yeah, I think I am right and you can't do what you want to do there. You can't take out $2k in 2023 and then $24k each year after that. I think. It looks like you have to take out $24k every year, even if your first payment doesn't start until December of that year?
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Old 09-21-2022, 06:03 PM   #16
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Oh, no maybe you are right. Found this:

https://www.irahelp.com/forum-post/6...ndar-or-fiscal

"n the first stub year of a 72t plan, either the full annual distribution or a pro rated amount by the month is permitted. The full annual is not a requirement."
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Old 09-21-2022, 06:12 PM   #17
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Wait, I may be confused about how things work now. I thought you could willy nilly choose to take distributions monthly or annually as long as you take out the same amount each year. I rather thought it was a tax year and not a 72(t) year though? Like if I set up our 72t in November or December, I was planning on taking out $25,000 as a lump sum this year and then maybe in Jan change it to taking out $2,083.33 every month of 2023. Is there a problem with this?
You should be able to do it either way, monthly or annually. It could affect the end date though, it's 5 years from the first distribution or until age 59.5, whichever is longer. Assuming it's 5 years, if you take annual distributions starting in Dec 2022 your end date would be Dec 2026, if monthly distributions started Dec 2022 your end date would be Nov 2027.
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Old 09-21-2022, 06:18 PM   #18
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Wait, I may be confused about how things work now. I thought you could willy nilly choose to take distributions monthly or annually as long as you take out the same amount each year. I rather thought it was a tax year and not a 72(t) year though? Like if I set up our 72t in November or December, I was planning on taking out $25,000 as a lump sum this year and then maybe in Jan change it to taking out $2,083.33 every month of 2023. Is there a problem with this?

Yeah, I think I am right and you can't do what you want to do there. You can't take out $2k in 2023 and then $24k each year after that. I think. It looks like you have to take out $24k every year, even if your first payment doesn't start until December of that year?
Here are the rules as I understand them:

1. You must take the amount at least annually. Cite: https://www.law.cornell.edu/uscode/text/26/72, search for (t)(2)(A)(iv).

2. You may take the amount monthly if you wish. Cite: Question 10 at https://www.irs.gov/retirement-plans...iodic-payments

3. If you use the amortization or annuity method, you cannot switch from annually to monthly or vice versa. Cite: Same as #2.

4. I believe that your 72(t) year does not have to align with a tax year. I couldn't easily find an explicit mention of this in the IRS rules. But there is no requirement in the law (See cite for #1), and the examples in (c) and (d) on page 4 of Rev Proc 2002-62 at https://www.irs.gov/pub/irs-irbs/irb02-42.pdf seem to support it. Also, and this is not dispositive, you might find https://www.irahelp.com/slottreport/...-calendar-year useful, although it could be seen as conflicting with Cite #2 unless you're using the RMD method.

(The example I alluded to that you're asking about was using a monthly distribution of $2K starting on a 72(t) year which starts 12/4/2023.)
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Old 09-21-2022, 06:29 PM   #19
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You should be able to do it either way, monthly or annually. It could affect the end date though, it's 5 years from the first distribution or until age 59.5, whichever is longer. Assuming it's 5 years, if you take annual distributions starting in Dec 2022 your end date would be Dec 2026, if monthly distributions started Dec 2022 your end date would be Nov 2027.
Monthly or annually won't affect the end date.

See https://www.law.cornell.edu/uscode/text/26/72, (t)(4)(A)(ii)(I):

where the penalty is applied if the SEPP is modified "before the close of the 5-year period beginning with the date of the first payment and after the employee attains age 59Ĺ"

So if I start on 12/4/2023 (my tentative plan and shortly after I turn 54.5), then on 12/5/2028 I am free to stop my SEPPs regardless of whether I've done annually or monthly.

(I suppose this depends on being able to start SEPPs on an arbitrary start date - see my previous post about that point.)

(It also assumes that the 5 year period ends after one turns 59.5, which in my example I will.)
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Old 09-21-2022, 06:39 PM   #20
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Oh, no maybe you are right. Found this:

https://www.irahelp.com/forum-post/6...ndar-or-fiscal

"n the first stub year of a 72t plan, either the full annual distribution or a pro rated amount by the month is permitted. The full annual is not a requirement."
The IRS guidance around SEPPs is not complete. I think I know who wrote the responses at that page, and if it's who I think it is, I would mostly but not completely trust him. But obviously do your own due diligence. Relying on SGOTIs for the particular details of SEPPs might result in a plan of which the IRS would not approve.
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