72-t
Can a person age 58 stop a 72-t. She will be 59 in March and has taken one payment in a lump sum in December 2013. If she is able to stop the 72-t would all she would owe is the 10% early withdrawal penalty plus interest? She also would like to change custodian on her IRA. If she changes the custodian will this stop the 72-t automatically? Will she incur and additional penalties for changing custodians?
Permalink Submitted by Alan - IRA critic on Wed, 2014-02-12 20:42
What was the date of the first payment in the series? Were the total 2013 distributions the correct amount under the plan? If not, the plan is already busted and a busted plan exposes all of the distributions from the beginning to retroactive penalty and interest. I would not transfer the account until we know these other details, but an account transfer does not bust the plan.
Permalink Submitted by Joseph Cantou on Fri, 2014-02-14 21:13
Thank you for the response, The date of the lump sum distribution was Dec. 26th, 2013. My understanding is if she transfered any nontaxable portion to a NEW IRA then she would bust the 72(t) but by just changing custodians and keeping the money within the same IRA she would not bust the 72(t). If a 72(t) is busted, penalty and interest are due on just the distributed money or just the money withdrawn not the remaining amonunt of money that was still to be paid out under the 72(t)? So an individual would not owe penalty and interest on unused funds within the 72(t) payout for the remaining of the five years.
Permalink Submitted by Alan - IRA critic on Fri, 2014-02-14 22:11
Since 2013 was a year that requires a full annual distribution, if the Dec distribution results in exceeding the annual 72t distribution, then the plan has been busted. But since we are still within 60 days of the distribution, any amount in excess of the 2013 distribution up to the amount of the Dec distribution can be rolled back into the IRA to save the plan. If this is not possible, the person would have to report a busted plan and pay the retroactive penalty on the 2013 tax return, Form 5329. The penalty only applies to distributions taken from the beginning of the plan for which the penalty was waived, not to distributions not yet taken. What the person should do now is to avoid any additional distributions before reaching age 59.5. Once that date passes, distributions are just taxable and no longer subject to the penalty. The IRS will bill out any interest due for late payment of the penalty paid with the 5329. Of course, once the plan is busted, any change of custodians is immaterial.