72(t) distribution conundrum
Individual has IRA at brokerage and has already taken $5,000 out in 2008. The individual is under age 59.5. We would like to set him up in a new IRA with a 72(t) withdrawal from a fixed annuity with distributions beginning in 2008. How can this be accomplished in light of prior distribution.
Permalink Submitted by Alan Spross on Sat, 2008-03-08 01:11
Unless the values involved have some unique peculiarities, it should be fairly easy to incorporate the 5,000 withdrawal into a 72t plan. For example:
1) Calculate the total annual 72t distribution using a 12/31/07 account balance and the interest rate for either of the two months before the month in which the first part of the $5,000 was distributed.
2) Directly transfer the current account into the new annuity IRA.
3) During the rest of the year distribute the annual amount required by the calculation less the 5,000 already distributed.
4) File a 5329 with the 08 return claiming the 72t exception for the initial account 1099R, and also the annuity IRA 1099R if necessary.
The key is meeting the actual requirements for the 72t plan, none of which actually require the 72t intent to exist when the first distribution is taken. In other words, you are backing into the plan using some of the flexibility available in the first year. After the first year, the plan becomes much more rigid. The assumptions used for the plan should be documented carefully in case they are needed. Hopefully, there is some way for him to escape surrender charges for the annuity IRA distributions.