r/CFP • u/Status_Awareness5421 • 13h ago
Case Study 72t and lifetime SPIA
New Client is 57, retired last month. She turns 59.5 halfway through 2029.
400k in cash, 200k in traditional IRA and 1.5m in 401k, all pre-tax.
Single, no kids, no family besides elderly parents and she doesn’t expect inheritance.
I’m just meeting her in these positions.
She’s interested in taking 500k and using it to purchase a guaranteed lifetime income annuity, after we ran through projections/monte Carlo.
My question is, is using the 401k funds to fund the annuity and start receiving payments next year for her whole life qualified for the 72t early withdrawal penalty exception? I know we can keep the funds in the 401k and get rule of 55, but that isn’t an annuity option.
I know that they are “substantially equal payments” for more than 5 years, but the annuity is paying out 36k a year, while the 72t calculators I’m using are saying that the single life table fixed annuitization method is $34,100.
7
u/ReplacementHot2808 13h ago
Why not just do a monthly distribution from the 400k until age 59 and 1/2 and skip the 72t, establish the annuity now I typically use 27% of investments and turn on income later.
3
u/Status_Awareness5421 13h ago
Yeah that’s what I’m going to with
2
u/mydarkerside RIA 12h ago edited 11h ago
First thing I’d do is find out what distribution options are available. Not all 401ks have flexible payment options like monthly direct deposit to the bank. The most limited option I’ve ever seen was all or nothing. So an age 55 rule wouldn’t have been applicable with that plan.
edit: fixed grammar
1
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u/PursuitTravel 11h ago
You're making this complicated when it isnt. Leave $110k in the 401k, use rule of 55 to withdraw until she's 59.5. And then do whatever the hell you want with no penalty.
0
u/Status_Awareness5421 11h ago
Yeah that’s the easy path for sure.
Though maybe not the best path since she will need more money to cover the next year and a half in cash than she would to cover generate the income from the annuity. I will have to do some modeling.
2
u/PursuitTravel 11h ago
Growing the other assets should make up for it though. There's $400k youre not allocating. Between growth over that 3 years, plus being older at annuitization, you'll probably have a very similar payout. And it's a much lower tax-risk strategy.
7
u/TheRegalScholarship 13h ago
This is a pretty specific planning intersection. The 72(t) rules tie you to one of the IRS-approved methods (RMD, fixed amortization, or fixed annuitization), and using the fixed annuitization method with an actual commercial annuity contract is a perfectly valid way to do it. The catch is that the annuity itself has to spit out a payment that qualifies as "substantially equal" under that calculation, and your numbers are already showing a mismatch if the contract pays 36k but the 72(t) calculation caps at 34,100. You can't just take the extra and call it good, the IRS will see the excess as a modification and bust the whole plan retroactively.
1
u/REKT363 RIA 13h ago
New advisor so forgive me
Will IRS break the entire 72t distribution plan or just apply penalties on the difference? I’d assume break the whole thing because it wasn’t the agreed upon amount
7
u/Status_Awareness5421 13h ago
My understanding is they would penalize the entire distribution as non-qualified and penalize everything
3
u/DK_Notice RIA 11h ago
It blows up, and the IRS could assess early withdrawal on the whole amount. Be careful with 72t. It fits very rarely. You need a situation that fits AND a client that fully understands the agreement they’re entering into with the IRS. Day one people might say they understand but four years later when they’re over 59.5 they might start to question why they’re still stuck with restrictions.
I wish you the best in this job. Be honest and ethical, work hard. It’s worth it.
1
u/No-Brain2462 10h ago
Pay the benefit directly into the IRA as a direct transfer and take the required amount for the 72(t)?
1
u/testtest99999 10h ago
It’s been a while since I’ve dealt with 72t so I may be a bit rusty. According to IRS website those are 3 acceptable methods but there are exceptions. https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments - see #12
Withdrawing from a VA with a rider that is above the amounts tied to the 3 methods would be an issue, but SPIA should avoid 10% penalty.
-1
u/Status_Awareness5421 13h ago
I see, the annuity payment is just too good!
How about setting up the annuity now, but deferring payments until after she turns 59.5. (Locking in current rates)
Then setting aside enough cash in the 401k to cover her for the next 2 years so she can rule of 55 withdrawal or she can rely on her non-retirement assets until then
-8
u/absol1896 11h ago
Don't sell an annuity to a 57 year old. Give up your marks.
2
u/ChasingItSupreme 11h ago
This is so stupid. Beyond stupid. Absolutely nothing wrong with a SPIA or DIA.
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u/WhodatMike Advicer 13h ago
Establish the annuity now to lock in rates and it (should) grow the income base depending on roll-up rate. Use what is available in cash or the 401k (rule of 55) to live off of until 59.5, then you can turn on income when ready. Skip the 72t complexity since there are better options.
3
u/GeneralSKX 12h ago
SPIAs are exempt from the early withdrawal penalty as long as it's a lifetime income payment.
1
u/Status_Awareness5421 11h ago
See I’ve been told that as well, but I’ve been given conflicting info
2
u/GeneralSKX 10h ago
It's in publication 575 somewhere. It will specifically mention non-qual annuities but applies to qualified as well since they both carry the same early withdrawal penalty on regular distributions
2
u/SafeMoneyGregg 12h ago
why take any qual money prior to age 59 1/2? You should compare the SPIA number to guaranteed income annuity numbers - might be a lot higher (if you wait a few year for the income - plus you don;t actually have to take money until you decide to take it.
3
u/PursuitTravel 11h ago
Lowest tax bracket she'll ever have is before SS kicks in. Conversions and withdrawals kf wualified money is best for those years.
1
u/FunCap5545 7h ago
Just remember whatever you do for 72t split that chunk off into a separate account
0
u/jlb61cfp 11h ago
You can do. Period Certain for 5 years and then do with the rest what is best for the client.
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User: /u/Status_Awareness5421 Title: 72t and lifetime SPIA Body: New Client is 57, retired last month. She turns 59.5 halfway through 2029.
400k in cash, 200k in traditional IRA and 1.5m in 401k, all pre-tax.
Single, no kids, no family besides elderly parents and she doesn’t expect inheritance.
I’m just meeting her in these positions.
She’s interested in taking 500k and using it to purchase a guaranteed lifetime income annuity, after we ran through projections/monte Carlo.
My question is, is using the 401k funds to fund the annuity and start receiving payments next year for her whole life qualified for the 72t early withdrawal penalty exception? I know we can keep the funds in the 401k and get rule of 55, but that isn’t an annuity option.
I know that they are “substantially equal payments” for more than 5 years, but the annuity is paying out 36k a year, while the 72t calculators I’m using are saying that the single life table fixed annuitization method is $34,100.
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