Terminating a series of 72(t) distributions
Client has been taking 72(t) distributions with the first occurring in December 2005. He takes one annual distribution on or about his birthday, which is Dec. 19. So the one he’ll take in a few days is the fifth. It is also his 59th birthday.
He would like to stop taking these distributions and the question that he has raised is that since he does not hit 59 1/2 until sometime in 2010, does he have to take a 2010 distribution?
I maintain that the answer is no because he will reach 59 1/2 before the date the next distribution would normally be made.
His financial advisor, who works for UBS, says that it may be required because the rules say he has to take distributions up until the later of the 5th distribution or age 59 1/2 so UBS wants to make him take one in 2010.
Which is the correct answer? And is there a regulation or code section I can cite to prove it to UBS if it turns out I’m right and they are wrong?
Margaret Stallworthy, CPA
Permalink Submitted by Alan Spross on Wed, 2009-12-09 16:42
You ARE correct but not due to the age 59.5 date, but like most 72t issues the answer to this is in some former IRS letter ruling. In addition, the IRS has not been picky about final stub year distributions unless they make no sense at all eg. taking out a greater amount than the annual distribution before the modification date.
This client has a modification date of Dec, 2010 because 5 years from the first distribution is later than turning 59.5. That means that prior to the exact date in Dec. 2010 the client cannot take a distribution that is NOT considered a valid 72t distribution.
So what would be considered a valid 72t distribution for 2010? There are 3 options:
1) Take nothing because 60 months worth of distributions have already been disbursed
2) Take the full annual amount as in prior years
3) Take a pro rated amount by the month. Since the modification date is in Dec, 2010, the last monthly payment would be for November, meaning 11/12 of the annual payment would be applicable.
Another option is to make the one time switch to the RMD method effective 1/1/2010. That will probably reduce the annual payment by at least 40%, even more if the account balance on 12/31/09 is down considerably from the initial balance. Under the RMD method, the options are the same as above, but applied to the reduced annual amount.
A valid 72t plan is determined between the IRS and the taxpayer, not the custodian. UBS cannot require a distribution in 2010, but they might want the client to sign off so they will not be held responsible. Many IRA custodians these days want to have nothing to do with taking responsibility for the validity of a 72t plan. As such, the vast majority of them will not offer the exception coding on the 1099R. Of course, if nothing is taken in 2010, there will be no 1099R for 2010.
I will try to locate the IRS ruling that clarifies taking nothing as an option if I can. Apparently that is what the client would prefer.