Jeffrey Levine: 5 Secrets to Making the Most of a Last-Ditch Income Strategy

2. Create the largest payment from the smallest balance.

“The goal of new 72(t) schedules is to create the largest payment from the smallest possible balance because remember: Whatever you use as part of your calculation … that's the amount that is kind of locked up or subject to the 72(t) schedule for the next five-plus years,” Levine said.

Therefore, the “smaller the amount that we need, the more money we leave kind of eligible elsewhere in case something goes wrong or at least the amount of money that I'm subjecting to this very rigid schedule,” he explained.

So, what an advisor should discuss with the client is how to create the largest possible payment, he noted. For starters, “even though you're able to choose your life expectancy table [and] can choose the uniform table [or] the joint table, don't!” he warned. “Use the single table” because it “creates the shortest life expectancy [and] takes the highest possible payment,” he explained.

Next, an advisor wants to use the highest possible interest rate to help create the largest payment, he pointed out. And “finally, we're going to calculate this using the amortization method because the amortization method will always produce the highest balance,” he added.

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3. Keep unnecessary amounts ‘unencumbered.’

After creating the highest payment from the smallest balance, excess amounts should be transferred to a separate account before starting the 72(t) schedule, according to Levine.

Even if a client must have all of their balance to create the necessary payment, it is important to consider splitting out some percentage of their account to a separate account as an emergency fund that can be accessed without breaking the 72(t) schedule.

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4. Minimize payments if distributions are no longer needed.

“If I don't need 72(t) payments any longer, I want to reduce those distributions to the extent possible,” Levine said.

It is important to keep in mind that “you can't stop it unless the client dies, becomes disabled or they run out of money, and none of those three are good,” he noted.

But if the client goes back to work, for example, and no longer needs the payments, you can try to "stop the bleeding or ... try to limit it to the extent possible,” he said.

“In general, you cannot change the distribution that you take from year to year, and you're not even eligible to change the method of distribution,” he said.

But he added: “The one exception to that rule is ... if you start with either the amortization or annuitization methods … you can switch at any time in the schedule in a one-time only irrevocable switch” to the required minimum distribution method.

“The best we could do under that scenario is to switch using the one-time method to the RMD method and lower those payments,” he said. But he cautioned: “It's an irrevocable switch, and you can't go backwards.”

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5. Reduce the chances for error.

To help lower any chances for an error being made, Levine said: “No matter what, I would always set up 72(t) payments as annual distributions.”

That, he explained, is because “if you've got 12 distributions, there's 12 things that can go wrong each year.”

To avoid that, “I would have annual distributions for all 72(t) clients set up at the beginning of the year for the annual amount.”

If the client wants monthly or quarterly distributions, “I'd have the 72(t) payment go from the IRA into a brokerage account and then set up those systematic distributions from the brokerage account over the year.”

Making monthly distributions from that account instead of the IRA means “there's only one chance for error, [with] one distribution each year” from the IRA, he said. If one mistake is made early in the year, he said, there is “plenty of time over the year to fix it,” he added.

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