72 T distribution Bust
A client is forced to take out more than the 72t amount in 2014 due to helping out a family member in need. Since this will cause her to bust her 72t plan, my understanding is she will need to pay the 10% penalty on all prior 72t distributions and interest to the IRS this year. Does she also need to have the tax returns amended for ALL prior year 72t distributions?
Permalink Submitted by Alan - IRA critic on Wed, 2014-07-30 19:28
No need to amend prior years. The retroactive penalty will be reported on her 2014 return using Form 5329 and an explanation outlining the amount penalized for each year starting with the first year of the SEPP. The IRS will figure and bill the interest separately. One exception to need for amended returns is when the client has OTHER penalty waivers in the last 3 years that could be used in place of the lost SEPP exception. For any of those year, an amended return with a 5329 claiming the changed exception would reduce the eventual penalty. If this plan has run for quite some time, busting it will be costly and perhaps client can get a loan or figure out an alternative to busting the plan. She also needs to consider if a new plan is needed to replace the busted one.
Permalink Submitted by Paul Carroll on Wed, 2014-07-30 21:04
Thank you for your response. So if the person started the 72(t) in 2013, does the CPA put the early withdrawls for 2013 & 2014 on the 2014 5329? Does busting the 72(t) need to be reported anywhere else? Thanks again!
Permalink Submitted by Alan - IRA critic on Wed, 2014-07-30 22:04
Yes, the reporting instructions are at the very end of p 57 of Pub 590, except that there is no reliable way to calculate the interest and therefore only the retroactive penalty amount should be entered on the 5329: http://www.irs.gov/pub/irs-pdf/p590.pdf. No other reporting is required.