72t journey, first steps

[Fermion]

Thanks for this thread. We were getting low on available cash so will probably start one as well.

Since you can tweak the interest rate input it seems you can set the annual amount to exactly the amount you want like $25,000. Withdraw this for 5 tax years (I’m 56) and fill in Form 5329. No other paperwork needed?

I am using Vanguard so I think I will just do a manual transfer to my checking for 25k immediately for 2022 and then another in January 2023-2026.

I'm with Fidelity and just set up a new IRA there to hold the 401k rollover money.

Don't you have to do it officially though? Like set up the 72(t) plan and have it documented? You don't just move $25k out of your account. Fidelity has a 6 page form you have to fill out and sign to initiate a 72(t) plan.

I do agree that you can adjust the amount using a variable rate up to the 5% cap. I was kind of thinking of using 4.95% just to give me that tiny bit of headroom in case the calculators or tables were off, but maybe that is overthinking things and I am safe with 5%. I don't think the IRS busts plans for pennies.

 

[RetireAge50]

I don’t think the IRS requires any documentation sent to them except the Form 5329 each year. But I’m still learning.
I was thinking I would rather manually do the plan myself rather than relying on the brokerage firm (Vanguard in my case). I will keep records of my initial balance and rate used in case of audit.

 

[zinger1457]

The benefit to getting your brokerage firm on board to your plans is so that the 1099R box 7 distribution code is correct (2- early distribution exception applies) so that a red flag isn't raised to the IRS and you won't have to mess with form 5329.

 

[SecondCor521]

Since you can tweak the interest rate input it seems you can set the annual amount to exactly the amount you want like $25,000. Withdraw this for 5 tax years (I’m 56) and fill in Form 5329. No other paperwork needed?

There are upper and lower bounds on the interest rate, so you can only tweak it so far.

The IRS needs no other paperwork. Generally people advise that you write down / take screen shots of your calculations, starting balance, interest rate, withdrawal method, etc. and store that with your tax notes in case they ever ask.

I am using Vanguard so I think I will just do a manual transfer to my checking for 25k immediately for 2022 and then another in January 2023-2026.

You should make sure that each of your $25K withdrawals happen on the right timing. Withdrawing $25K now and then your 2023 $25K before 9/23/2023 may look like two withdrawals in one 72(t) year and - I think - would bust your SEPP.

 

[zinger1457]

You should make sure that each of your $25K withdrawals happen on the right timing. Withdrawing $25K now and then your 2023 $25K before 9/23/2023 may look like two withdrawals in one 72(t) year and - I think - would bust your SEPP.

The IRS doesn't care when or how often 72t payments are made during the year as long as the 1099R totals at the end of the year are correct.

 

[RetireAge50]

The benefit to getting your brokerage firm on board to your plans is so that the 1099R box 7 distribution code is correct (2- early distribution exception applies) so that a red flag isn't raised to the IRS and you won't have to mess with form 5329.

I can’t find anywhere on Vanguard to have them set up the 72t. They seem to want you to do it yourself or with the help of a cpa. This is actually fine with me as I would rather do it manually each year and specify the exact tax withholding while I’m at it.

 

[Fermion]

This is the form Fidelity requires you to fill out:

 

[SecondCor521]

The IRS doesn't care when or how often 72t payments are made during the year as long as the 1099R totals at the end of the year are correct.

It's my belief that the "72(t) plan year" and the tax year do not have to coincide. See posts #16 and #18 on this thread for some discussion on this point.

So I can imagine 72(t) plans that I think the IRS would think are valid where the 1099-R totals are not consistent between the first and second tax year, and also 72(t) plans where the 1099-R totals are consistent but the IRS would think the plan invalid.

 

[zinger1457]

It's my belief that the "72(t) plan year" and the tax year do not have to coincide. See posts #16 and #18 on this thread for some discussion on this point.
.

If the 72t is started during the year then the first and last years are called stub years. If started in Sept 2022 you have several options, can make the equivalent of 4 monthly payments the first year then 8 the last year 2027, or do the full annual payment the first year 2022 and make the last annual payment in 2026. The key is making the equivalent of 60 consecutive monthly payments, of course this assumes you are using the 5 year rule and have already reached 59.5 before the final year.

See Ed Slott's comments:
https://www.irahelp.com/forum-post/53124-72t-distributions-rolling-calendar-year-basis

 

[SecondCor521]

See Ed Slott's comments:
https://www.irahelp.com/forum-post/53124-72t-distributions-rolling-calendar-year-basis

That's a post by SGOTI. (I suspect a well respected SGOTI if it is who I think it is, but I don't think it's Ed Slott, and - more importantly to me - it isn't the IRS.)

We've already mentioned the ideas of stub years and trusting SGOTI for tax advice earlier in this thread.

 

[RetireAge50]

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

Not sure about Fidelity but with Vanguard here is how it worked for me:

1. Called 401k at TRowePrice and they sent me a check payable to Vanguard. Took 7 days to receive.

2. Used Vanguard App for mobile deposit of the check. 5 minutes and Funds were available for trading.

3. Called Vanguard to set up 72t over the phone. I had to tell them the amount, frequency, start date, and tax withholding percentage. Total time about 10 minutes.

Note: Vanguard said it is up to me to determine any tax implications and to file the exception for SEPP (form 5329).