72t
Scenario: A client is currently taking 72t distributions from his IRAs within our firm and from IRAs outside of our firm. In 2007 one of the 72t IRAs was destroyed because the client wanted more money than the allowed SEPP. Therefore he disqualified the 72t IRA at the outside firm.
Question 1: Does this disqualify all 72t IRAs that were in place or does each 72t IRA stand alone?
Question 2: If a client is receiving monthly 72t distributions, can the client opt for a one time distribution for the remaining annual SEPP amount and in doing so stop the monthly distributions for the remainder of the year? This would not change the SEPP on an annual basis, but rather the timing of when the SEPP amount is received during each year.
Question 3: If a client is receiving 72t distributions, can the client take a distribution in excess of the SEPP for the year as a one time distribution and roll the funds back into the IRA within 60 days and still maintain a qualifying 72t?
Permalink Submitted by Alan Spross on Mon, 2008-04-21 19:22
1) The SEPP is busted if the initial account balance for the plan included the IRAs of both firms, as that would comprise a single plan. However, if the other firm’s IRA provided the initial balance for a totally separate 72t plan, modification of that firm’s plan would not affect the validity of the plan through your firm. The client should have the initial calculation documented so that questions like this can be determined. There is no limit to the actual number of operating 72t plans a taxpayer can have, although secondary plans are usually started at least a couple years after the initial plan.
2) Yes, the IRS does not care about the payment frequency of the distributions, just the total annual amount taken out. Stub years for the first and last calendar years of a plan can also have a pro rated annual distribution.
3) Yes. The typical 60 day rollover for temporary needs can be done within a 72t plan, however this is dangerous because by using up the one permitted rollover within a 12 month period, the flexibility to fix other errors by rollover is lost. While a 72t distribution is not rollover eligible, this applies for amounts that are required to meet the annual calculation. Amounts taken out that are in excess of the annual amount are not considered 72t distributions, and can be rolled back into the account. Another way of putting this is that the gross amount required of the plan must show on line 15 of Form 1040, and if a rollover is also reported on that line, it must be for amounts in excess of the required 72t amount. The chronological order of these distributions during the year does not matter.
Permalink Submitted by Robert Warner on Tue, 2008-04-22 14:48
Does an individual have the option to take a pro-rated or a full annual amount of the SEPP if the SEPP distributions start anytime after January for each end of the stub?
Scenario: individual starts 72t in February 2008
Option 1:
Year 1 – 11 months
Year 2 – 12 months
Year 3 – 12 months
Year 4 – 12 months
Year 5 – 12 months
Year 6 – 1 month
Option 2:
Year 1 – Full Year
Year 2 – Full Year
Year 3 – Full Year
Year 4 – Full Year
Year 5 – Full Year
Permalink Submitted by Alan Spross on Tue, 2008-04-22 20:02
Yes, either option will be OK. Also see attached for a thread involving the final stub year option when age 59.5 determines modification in lieu of the 5 year requirement.
http://72t.net/Discussion/ViewReplys.aspx