IRA dist prior to 72T plan
I have a 57 yr old client that took an $18,000 early dist from her IRA in Jan. She is unemployed and is funding her living expenses with her IRA. She now needs to take add’l funds and wants to set up 72T to avoid penalty. Is there a way to exclude the $18,000 dist (she’s ok with paying the penalty on that amount) and calculate the 72T plan based on future distributions?
Permalink Submitted by Alan Spross on Tue, 2012-06-19 16:19
Yes, she can start a 72t plan while having an earlier penalized distribution in the same year.
The account balance used for the 72t calculation must be a balance after the earlier distribution and after any other distributions or contributions to the IRA account used for the plan. For the first year of the 72t plan, she has the choice of either pro rating the annual payment by the month OR taking out the full annual amount. Her plan will terminate in 5 years since that is longer than reaching 59.5, and she must take out a minimum of 60 months of distributions to complete the plan. This means if she opts to take out the full annual amount for 2012, she can complete distributions by the end of 2016. She will have several options for 2017 before the plan officially ends 5 years from the date of her first 72t distribution.
Note that if she busts the plan for any reason, the penalty will only apply to distributions taken prior to age 59.5. For that reason, in the year she actually reaches 59.5, it might be wise to delay distributions as much as possible until actually reaching 59.5. That would reduce her exposure to penalty if she does not properly complete the plan or if there is something wrong with the initial 72t calculation.