72t potential problem

Submitted by Kip Hartman on Thu, 2015-02-26 20:02

I have a client that has been taking substantially equal periodic payments out of their IRA annuity for several years now. However, this last year there was a fee that they were paying to the insurance company was not charged on their annuity for 2014. So they wound up having a 1099 issued for a higher amount than in previous years. The client’s withdrawal paperwork has always been filled out the same every year. What do they do?
Have they busted the plan?…is there any exception for this deviation? Thank you in advance!

FYI…the company has always issued a 1099 coded 1 for premature withdrawal and they then file the 5329 with their taxes…they have been doing this for about 4 years now.



Submitted by Alan - IRA critic on Thu, 2015-02-26 23:14

The plan is busted unless that 1099R is corrected. Fees are normally withdrawn directly from the IRA and not reported on a 1099R as distributions. so perhaps the 1099R is in error. This applies to IRA administrative fees, advisory fees. and wrap fees. What is this fee for?



Submitted by Kip Hartman on Fri, 2015-02-27 00:03

The fee was an early withdrawal fee/penalty….the penalty went away which caught them off guard….Is there any way to amend the 5329 from prior years to manually add the cost of the penalty on top of the 1099 to those years…in reality the 1099r was wrong from the start and this higher amount for 2014 was correct.  ORWhat happens if a taxpayer who is almost done with the 72t payments( 1 year left) files the 5329 like always and puts in the 2014 1099r like usual?  In the clients mind they have done what they were suppose to because they have always filled the withdrawal paperwork out the same year after year.  I guess the question that I’m asking, is how likely are they to have the IRS say they busted the plan based off of your experience? 



Submitted by Alan - IRA critic on Fri, 2015-02-27 02:55

  • This is not looking good. A plan is busted the first year that the amount distributed reflected on the 1099R differs from the initial 72t calculated distribution. This plan could have been busted from the start if the first 1099R forms were less than the calculated amount because of surrender charges, and if so this reflects a major risk of using an IRA annuity for a 72t plan. If these fees were no more than surrender charges for redeeming shares in an annuity sub account, those first 1099R forms were probably correct since surrender charges are not the type of fees that should be directly debited from the IRA; rather they depress Box 1 of the 1099R.
  • The IRS may not check the distribution against the calculations as they would have to ask for the calculations to be submitted to do that. They are probably taking the easy way out and just looking for 1099R differences from year to year. But I think this plan was probably busted to begin with and the IRS is yet to recognize that.
  • I am not aware of any PLRs regarding 72t plans and surrender charges, but it is possible that some exist. A taxpayer should not start a 72t plan using an IRA annuity if there is any possibility of surrender charges for the distributions.


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