IRA distribution one day before age 59 1/2
Hi,
Came across a situation where an IRA participant took a large IRA distribution one day prior to turning 59 1/2. Their intent was to take it on or after they turned 59 1/2 (and they told the custodian this), but a mistake at the custodian allowed the distribution to be processed one day early (they received in the mail and just processed upon receipt). It is beyond 60 days sine the distribution was made.
Anyone know if there is any recourse in getting the IRS to forgive the 10% penalty? What would be the procedure?
Thanks very much for any help.
Regards,
-Dave
Permalink Submitted by Alan Spross on Mon, 2008-03-03 20:47
Do they have a 2007 1099R now coded as an early distribution? Was the disrtibution date directive to the custodian in writing? Has the money left their checking account? Amount over 50,000?
Permalink Submitted by David Briegs on Mon, 2008-03-03 21:07
Yes, they have a 2007 1099R coded as early. Custodian trying to get corrected, but not sure if can yet. Distribution form did not have directive on the date. Custodian did acknowledge that client said not to process until 59 1/2 date, but failed to put date on form and received and processed it a day early. Amount is exactly $50,000. Money went into taxable account and much of it was used.
Permalink Submitted by Alan Spross on Mon, 2008-03-03 21:36
I would exert as much pressure as possible on the custodian to revise this, although they legally may not be able to.
The easy IRS relief comes by way of 60 day rollover relief, but that does not apply here since his use of the money indicates he never intended a rollover, nor would he likely have the funds to roll back now if he intended to pursue rollover relief with it’s lower user fees. $50,000 is a threshold where the user fee becomes $1,500 to request rollover relief. Non rollover PLR requests now carry a huge fee of $9,000 plus the legal costs.
Therefore, this is the type of frequent situation involving ineffective communication between IRA owner and custodian, and the IRS seems to want issues resolved directly between the two in those situations.
Probably unlikely, but he would have an exception to the penalty to the extent that met any of the other non age related exceptions to the penalty, such as medical, higher education costs, disability, first home etc.
Even more remote is the possibility of backing into a 72t plan for 5 years, but he would probably need a balance of around 1,000,000 and meet several other contingencies in order to meet the requirements, and then he would need to be restricted to an exact amount of 50,000 for each of the 5 years even if the numbers could be worked out (interest rate, age, separate-joint, and account balance).
Permalink Submitted by Jim Walker on Tue, 2008-03-04 19:14
An individual reaches the specified age 1 day before his birthdate. Thus an individual whose birthdate is January 1 turns 65 for the purpose of the additional std deduction on 12/31 — just look at the instructions to the 1040.
You should be able to apply the same logic in this case. Individual has lived for 59.5 years on the day before his birthday.
I assume you have a 1099-R coded 1. You should reference the IRS instructions and ask the custodian to amend the form to show a code 7.
Jim Walker