Should You Begin 72(t) (SEPPs, SOSEPPS) Distributions in the Fiscal or Calendar Year?

By Beverly DeVeny, IRA Technical Expert

Follow Me on Twitter: @BevIRAEdSlott

A client is setting up a 72(t) distribution schedule – substantially equal periodic payments that will be exempt from the 10% early distribution penalty. Her first distribution won’t be made until September and she would like to take monthly payments. But she also wants the full distribution for the first year, not just four payments. Can she do this?

The answer is yes she can. An account owner can either use a calendar year for monthly payments or a fiscal year with a short first year and short last year.

So how do you go about doing this? We tell advisors and clients to keep things as simple as possible. The more changes or variations there are to the payments, the more likely it is that a mistake will occur. Mistakes in a 72(t) payment can be fatal. They can destroy the payment plan and leave the account owner subject to the 10% early distribution penalty retroactively for any of the payments made before age 59 ½.

The two easiest ways to get out a full current year’s distribution when monthly payments are desired are to take the 12 months as one for the current year and set up the monthly payments beginning next year. The other way would be to set up the monthly payments beginning in September of the current year and take a one time, lump sum distribution of the remaining monthly payments for the year.

What if a mistake is made this early on? The payment plan should be terminated and any applicable penalties should be reported on IRS Form 5329 and paid. A new plan can be established in the following year. Make sure a new calculation is done for the new plan. Don’t use the old one from the plan that blew up. Interest rates change monthly and you are limited in the rates you can use when you set up a 72(t) plan.