general 72t questions
have a client wanting to use the 72t exception will be 56 at the end of this december -2012
1- what balance should i use to do the calculation
2 – if the account is in an advisory fee based account does the deduction count as an additional withdrawal (ie a modification)
3 – when can the 72t be modified-if taken annually and/or monthly (client will be past 59 1/2 after the 5 years)
4- is it more beneficial if the client takes the first distribution in december vs january (will it shorten the waiting period to modify by more than a month-someone said this to me but i don’t know if it’s true
thank you very much for your assitance
Permalink Submitted by Alan Spross on Mon, 2012-11-12 00:02
1) The balance must be a reasonable representation of the account value when distributions are begun. It should not go back more than 6 months and should not be greater than 15% more than the current value. Also, there can be no other contributions or distributions between the date used for the account value and the inception of the plan. The value must be documented by making a copy of the plan statement or on line end of day statement used.
2) No. The withdrawal is not reported on the 1099R form.
3) After 5 years of distributions in this case. The modification date would be 5 years from the date the first distribution was received plus a couple days for a safety margin.
4) A december start vrs January will not reduce the modification period and will only move that date back by one month. In other words, it’s either 5 years from Dec or 5 years from January. However, a December start would allow client to distribute a full annual payment for 2012. Client could then take monthly payments for all of 2013-2016. But the mod date would still be Dec, 2017. He would just have front loaded the distributions from 2017 to 2012. If he is not a good budgeter this is dangerous vrs simply taking 60 monthly payments.
NOTE: if client were to bust the plan for any reason, the retroactive penalty and interest would only apply to distributions made PRIOR to reaching 59.5.
Permalink Submitted by Robert Lozzi on Mon, 2012-11-12 19:00
Thank you for that very helpful information. But I do have a question in item number 1– from inception there were a couple of rollovers pre 2007 and one this august for $19 – if i understand correctly this would cause a problem if i were to use the current balance? if do you know why and is there a refernce source i could read
thanks again
Permalink Submitted by Alan Spross on Mon, 2012-11-12 22:47
Very little in the way of IRS guidance on 72t plans. In RR 2002-62 the IRS stated that the account valuable used must be a reasonable valuation in relation to the balance when the plan begins. They don’t define reasonable anywhere, the 15% leeway is simply my judgement for a figure that the IRS would probably not question. Many people simply use the highest account balance in the last 6 months, but if the market dropped 30% since then, that value may not pass the “reasonable” test.
If the most recent distribution or contribution was the August one for $19, all that means is that the client could not use an account balance prior to the date of that rollover contribution. He could use a balance after that rollover up to the present. Since interest rates are so low, most people need to use the highest balance they have reached, but again I would find one that did not exceed the current balance by more than 15%.