72t
I have a client age 57 who is taking distributions from an IRA which is set up as a 5 year immediate annuity. IRA custodian has indicated code 1 on her 1099R and will not view the distribution as an exception to the pre-59 1/2 penalty free withdrawal because of the lifetime payout clause in the 72t. is there anything she can do? what is the IRS history in cases with this type of distribution?
any help would be appreciated.
thanks!
Permalink Submitted by Alan Spross on Mon, 2009-02-02 18:50
If the entire IRA will be distributed in 5 years, then the annual distributions are far in excess of what a lifetime based 72t calculation will generate, and there would never have been a viable 72t plan.
If this is the only IRA account that comprises the original plan balance, there is no solution to the penalty. But if there were other IRAs the client has which could be included, and if the first year for the plan was 2008, it may be possible to “back into” a viable plan by jiggering the interest rate and the original account(s) balance. This is a very long shot, but should at least be investigated. Another IRA from which no distributions are taken could offset the fact that the annuity IRA distribution is far too high.
The philosophy here is that a valid plan does not necessarily require execution of the original intent, and could still be valid if it can be made to fit the calculation requirements of RR 2002-62.
Permalink Submitted by Brian Stern on Mon, 2009-02-02 21:08
this is not the only IRA balance the client has. The IRA was split and. obvioulsy, distributions were taken off of the Immediate Annuity portion.
Permalink Submitted by Alan Spross on Mon, 2009-02-02 21:59
Then, if the entire account balance of both of these IRAs were considered to constitute the original balance of the 72t plan, there might be a high enough value to generate a calculated 72t distribution that falls within the guidelines.
There should always be some documentation of the calculations used when a 72t is started. Trying to locate these would be the first place to start. This documentation should include a copy of the statements of all IRAs included as of a date within a reasonable period prior to the start date, the interest rate used, and joint vrs individual life expectancies.
If that is the case, and if the distributed amount meets the requirements, the client can simply add Form 5329 to their tax return and claim the 72t exception (Code 02).
If a valid plan had to last beyond 5 years, then the other IRA could be used to continue the distributions after the annuity IRA had paid out.
Most IRA custodians now do not want to underwrite 72t validity, and therefore code the distributions as early and force the taxpayer to add the 5329.