72t payment schedule
A client that has adopted the ’02 change to recalculate his annual 72t distribution level (the change that was enacted in an attempt to soften the effects of the mandated distributions on IRA account values) called me wondering about the ramifications of leaving his distribution level the same as last year. His IRA value has declined, but he does not wish to lessen his distribution at present to the level that would be dictated by the diminished value of his account. He has lost another income source that makes this question an important issue to him.
In prior years, his distribution level has generally grown in that his account value had been increasing. As he is having his annual distribution adjusted per the ’02 changes, I’m seeking the answer to this: would NOT changing his distribution to the dictated lesser amount for this next year be considered a ‘disallowed alteration’ to his 72t schedule and render the prior distributions subject to penalties?
Permalink Submitted by Alan Spross on Tue, 2009-01-13 00:58
Yes, failure to follow through with the recalculation method adopted would bust his current plan. Recalculated 72t plans are essentially sub plans of the basic amortization or annuitization plans, but like the RMD method they become subject to the risk of large account balance changes from year to year.
The only permitted change at this point would be the one time switch to the RMD method, but that would only further reduce his already reduced indicated 2009 distribution amount, and is therefore of no benefit.
If he MUST bust the plan as a consequence of distributing a higher amount, he can avoid including 2009 in the penalty by filing a voluntary bust as of 12/31/08 on Form 5329 and paying the penalty for all years up through 2008. He could then start a new plan in 2009. Of course, even this is small consolation compared to the retroactive penalty plus interest the IRS will bill out. You don’t indicate when this plan began, but the more recent, the better.
Of course, cutting his expenses and/or finding another source of income until the plan modification date would be the first options to pursue.
Permalink Submitted by mk foss on Tue, 2009-01-13 04:07
I assume that the taxpayer had already made the one-time switch to Method 1 and that’s why he has this dilemma.
Withdrawing a larger amount than calculated would be an impermissable change – that would cause all prior withdrawals to be subject to the 10% penalty as Alan indicated plus interest. If the withdrawals go back to 2002 or earlier – that could be significant.
If he/she has another IRA – amounts could be drawn from that account. Either by starting a new series of 72t payments or by using one of the other exceptions (if one will apply) or simply paying the penalty on a withdrawal from another account.