72t Distribution Details

Submitted by Michael Copley on Fri, 2015-11-27 01:47

I started early this year a 72t distribution from my traditional IRA..an account I’ve had for 25 years. Turns out, I had a small non-deductible cost basis that I forgot about but had been tracking on form 8606 all these years. The non-deductible amount is greater than my uniform series of 72t distributions.

Question I have is this. As I prepare for the upcoming 2015 tax reporting season, I am curious if I need to “officially” let the IRS know I started a 72t distribution or simply consider this a unintended tax-free withdrawal of my non-deductible cost basis? I know my brokerage will code the distribution on Form 1099-R with “1” (early distribution without exception).

Or…should I complete form 5239 and let the IRS know the distribution was the beginning of a 72t distribution plan? BTW, there would still be a small non-deductible cost basis going into 2016, but which would be less than the 72t SEPP amount.

More generally, how do I considered the non-deductible cost basis in my 72t payment calculations (e.g., account balance determination)? In hindsight, I’m thinking I needed to deduct the non-deductible cost basis from the taxable portion of the account balance for use in my 72t calculation. I’m not sure really…help.

Thanks much for the clarification on this issue.

Mike C.



Submitted by Alan - IRA critic on Fri, 2015-11-27 03:15

  • While your 72t IRA must be walled off from other IRA accounts you have with respect to your 72t plan, your IRA basis is an exception and remains aggregated over all your IRAs. Therefore you would complete Form 8606 with your return and allow and the form will calculate how much of your 72t distribution is taxable. But to adhere to your plan you are only dealing with the gross distribution which includes both taxable and non taxable amounts.
  • The only notification to the IRS that you are taking 72t distributions is the 1099R coding showing code 2 or since most custodians will not provide that coding, you must attach the 5329 showing exception code 02 on the line. The 5329 tells the IRS that you are taking 72t distributions. You should retain a copy of your plan calculations including a copy of an IRA statement showing your initial 72t IRA account balance.
  • In summary you ignore the IRA basis with respect to the plan calcs and the amount distributed as the IRS does not care how much of your distribution is taxable when looking at your plan. You only reflect this IRA basis on Form 8606 which will calculate the taxable and non taxable amount of your distribution. The gross distribution goes on line 15a of Form 1040 and the taxable amount calculated on the 8606 goes on line 15b.
  • Let me know if you have more questions.

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