72-T account runs dry
Should a client’s IRA account value that has been on 72-T SEPP distributions run dry (that is the account value has depleted down to zero and there is nothing else in the account to distribute) PRIOR to the mandatory longest-of-age-59&half-OR-5-years’ time frame… does the retroactive 10% early penalty come into play on all prior distributions (because the 72-T stipulated distribution amount has been altered) or is there no penalty assessed due to the fact that the account has run out of money?
Permalink Submitted by Alan - IRA critic on Tue, 2013-10-22 19:36
There is no penalty if the account runs dry, and no particular way to report that the account was exhausted. If more than one IRA account funded the plan and only one is exhausted, then the distributions must be taken from the other account until all IRA accounts that were part of the plan have been exhausted. The IRS gets year end account value reported on Form 5498, so they can see there are no assets left to distribute.
Permalink Submitted by Robert Wright on Sat, 2013-10-26 11:37
So, at one time (during the crisis?) it seems like you were able to reduce your 72t withdrawal in order to avoid running the iRA to zero.Can you still reduce your 72t withdrawal in order to prevent the IRA from running out of money?
Permalink Submitted by Alan - IRA critic on Sat, 2013-10-26 16:43
Yes, you can make a one time switch to the RMD method, which on an account that has not lost value since the plan began would reduce the payment around 40%. It is very rare that a 72t account would run dry, and would only happen due to disastrous investment results. Once that happens the RMD switch might not help much, and if you needed the money, best to run it dry without penalty before using any other retirement plan funding subject to penalty.
Permalink Submitted by Robert Wright on Sat, 2013-10-26 20:24
Thanks Alan.