Does Pre 59 1/2 distribution preclude later 72(t)
A client is 54 years old, has left her job and wants to start new business using rollover IRA funds (from a pension lump sum rollover). She projects a need of only 6 – 12 months of living expenses. Instead of locking in a 72t, can she try taking early withdrawals and then do a 72(t) later, if need be? Thank you.
Permalink Submitted by Alan Spross on Thu, 2008-09-04 22:43
From a practical standpoint, the answer is No. Taking distributions after a triggering event such as separation from service requires waiting for another triggering event. In her case that would be reaching age 59.5 and at that point there would be no need for a 72t plan since the early distribution penalty would no longer apply.
If she still had employer plan funds with the employer AND separated in the year she turned 55 or later, distributions directly from the plan would not be subject to penalty. If the client’s birthday was early in the year, it is possible to separate several months prior to actually reaching age 55 and still qualify. But once the funds are in an IRA it is too late.
Permalink Submitted by Liz Cauble on Tue, 2008-09-09 19:51
If the funds are rolled into an IRA what does a triggering event have to do with anything? She is 54. she is leaving her employer at the end of the month. Can she take a premature distribution this year and then if she needs to begin a 72t next year?
Permalink Submitted by Alan Spross on Tue, 2008-09-09 23:08
I apologize for the last post. I had been dealing with NUA issues and had NUA on the brain. You are correct that triggering event is immaterial here.
She can do as you request. A 72t plan can be started anytime. Her distribution this year would incur the penalty. She could then start the 72t next year to last the longer of 5 years or until she turns 59.5.
That said, if she were to start the 72t later this year, for 2008 she has a choice of pro rating the annual amount as per the first month of payment OR taking the full annual amount. She cannot take some amount in between those two figures. Perhaps her needs can be tailored to that flexibility to avoid that penalized distribution this year.