I have a financial planning client who dropped into my office to review his current investments and upcoming college funding needs. I did not prepare his returns (H&R Block did). The client is age 52 and his wife is 54. They have several IRAs (Roth, traditional) and non-IRA accounts that are all invested in various annuities (variable and fixed ... no, I did not sell them to him). He is a very conservative investor and an engineer by profession. Two years ago when the twin daughters were age 13, his annuity representative completed paperwork for him to begin annuitizing three of his accounts: two IRA accounts and one non-IRA account.
The reasoning offered by the client was that he was told this was a way to fund college for the girls. (My guess is that the rep didn't want to 'lock up' the money in another annuity via a 1035 exchange which might start the whole 7- or 10-year surrender charge schedule and then the cash wouldn't be available so readily for college. That ignores the fact that most contracts allow a withdrawal of 10% without annuitizing).
All three accounts are paying out on a 10-year period certain basis (so they'll be down to zero when he's age 60).
On his 2013 tax return he showed line 15b total of $16,600 (for the IRA distributions) and line 16a for $13,00 and line 16b for $8,100 (taxable portion).
He presently does not need the extra cash (didn't need it either when they started this two years ago). His college financial aid base year is a couple of years away but this extra income will not be helping them out at that time either. Add to that the extra tax hit now, and he's not a happy camper.
So the client is asking about options. He's brought up the 72(t) Substantially Equal distribution rules. I say 'no' he doesn't fall under them. As I understand them, he would need to base them on life expectancy but the distributions are coming out over 10 years. And even that amount withdrawn will be slightly different each year as well.
He has also found reference to IRS Pub 575:
An eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan except:
1. Any of a series of substantially equal distributions paid at least once a year over:
a. Your lifetime or life expectancy,
b. The joint lives or life expectancies of you and your beneficiary, or
c. A period of 10 years or more,
He is now asking about the IRA one-rollover-per-year rule (http://www.irs.gov/Retirement-Plans/...er-Year-Rule): Current law
You don’t have to include in your gross income any amount distributed to you from a traditional IRA if you deposit the amount into another (or the same) traditional IRA within 60 days (Internal Revenue Code Section 408(d)(3)).
I don't think that provision counts in this case. He is, after all, getting a 1099-R from the insurance company.
My recommendations were to have him divert $6,500 to a spousal IRA (his wife is over 50, has earned income and does not have a company plan). And divert the remainder to the already existing 529 plans for tax-free compounding and future withdrawals.
I may be wrong about this but if someone else has any experience with 72(t) or the rollover rule and has a different interpretation, please let me know.
The reasoning offered by the client was that he was told this was a way to fund college for the girls. (My guess is that the rep didn't want to 'lock up' the money in another annuity via a 1035 exchange which might start the whole 7- or 10-year surrender charge schedule and then the cash wouldn't be available so readily for college. That ignores the fact that most contracts allow a withdrawal of 10% without annuitizing).
All three accounts are paying out on a 10-year period certain basis (so they'll be down to zero when he's age 60).
On his 2013 tax return he showed line 15b total of $16,600 (for the IRA distributions) and line 16a for $13,00 and line 16b for $8,100 (taxable portion).
He presently does not need the extra cash (didn't need it either when they started this two years ago). His college financial aid base year is a couple of years away but this extra income will not be helping them out at that time either. Add to that the extra tax hit now, and he's not a happy camper.
So the client is asking about options. He's brought up the 72(t) Substantially Equal distribution rules. I say 'no' he doesn't fall under them. As I understand them, he would need to base them on life expectancy but the distributions are coming out over 10 years. And even that amount withdrawn will be slightly different each year as well.
He has also found reference to IRS Pub 575:
An eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan except:
1. Any of a series of substantially equal distributions paid at least once a year over:
a. Your lifetime or life expectancy,
b. The joint lives or life expectancies of you and your beneficiary, or
c. A period of 10 years or more,
He is now asking about the IRA one-rollover-per-year rule (http://www.irs.gov/Retirement-Plans/...er-Year-Rule): Current law
You don’t have to include in your gross income any amount distributed to you from a traditional IRA if you deposit the amount into another (or the same) traditional IRA within 60 days (Internal Revenue Code Section 408(d)(3)).
I don't think that provision counts in this case. He is, after all, getting a 1099-R from the insurance company.
My recommendations were to have him divert $6,500 to a spousal IRA (his wife is over 50, has earned income and does not have a company plan). And divert the remainder to the already existing 529 plans for tax-free compounding and future withdrawals.
I may be wrong about this but if someone else has any experience with 72(t) or the rollover rule and has a different interpretation, please let me know.
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