72(t) and First time home buyers exception
Good morning,
I can’t seem to get a solid answer from several accountants I’ve spoken to regarding a person 55 years old already taking 72(t) distributions from a TIRA and wanting to withdraw additional $10k from same account to put towards first time home buyer.
Will this person incur the penalty of all prior 72(t) distributions if they take the additional $10k to purchase home?
Any thoughts would be greatly appreciated!
Kirk
Permalink Submitted by Alan Spross on Thu, 2009-12-03 18:35
More than likely, this distribution would bust the current SEPP plan, and a different IRA account should be used if the person has one.
While I would not take any particular comfort in it, there HAS been a recent tax court ruling (Benz case) under which an additional distribution for higher education costs was deemed not to have modified the 72t plan. However, this case flys in the face of many years of IRS determinations that there are no exceptions to the exact distribution requirements other than death or total disability of the plan participant. The case may be appealed by the IRS and may not stand, and in addition there is the real question whether Benz can be applied to other exceptions in addition to higher education expenses. Here is a link to a brief explanation of Benz:
http://www.72t.net/Articles/ArticleShow.aspx?WA=aa61d472-0237-4cb8-9e91-…
Permalink Submitted by Kirk Halveland on Thu, 2009-12-03 19:07
Thanks Alan.
So moving funds needed for the first time home buyer from the existing TIRA can be transfered to a new TIRA. Then withdraw without busting the SEPP in the existing account, right? The only other current IRA now is a ROTH, which we don’t want to take any withdrawals.
Permalink Submitted by Alan Spross on Thu, 2009-12-03 19:24
Kirk,
No, the person would have to own a TIRA (or Roth) that was never part of the 72t plan initial balance. In this case, the transfer of 10,000 to a new TIRA with no prior balance just makes the new IRA part of the original 72t plan and the additional distribution would not be allowed (ignoring Benz). While the additional distribution itself would not be penalized, it would still bust the 72t plan and result in retroactive penalties and interest back to the first year of the plan.
I understand the reluctance to draw down the Roth IRA, but that may be the best solution here because it would NOT affect the 72t plan in any way unless a Roth conversion was done from the original 72t TIRA balance making it part of the 72t balance. Assuming the Roth is not part of the 72t plan, the 10,000 first home distribution would be tax and penalty free.
One plan that would work in this case would be to:
1) Take the 10,000 from the Roth tax and penalty free, but reported on Form 8606
2) Replace the Roth funds by converting 10,000 from the current TIRA to a TOTALLY NEW Roth IRA conversion account, which then becomes part of the 72t plan. Taxes would be due on the conversion, but the person would be left in the same position as if the distribution from the TIRA was allowed. The Roth balance would be restored to it’s original balance and there would be no early withdrawal penalty. However, the added complexity with the 72t plan DOES increase the moving parts of the plan and may invite an IRS inquiry. The tax code DOES contain approval for doing Roth conversions from a 72t plan IRA, but reporting it properly and understanding the relationship between the 3 accounts is critical.