72 t time frame
I have a client that established a 72 t agreement for IRA distributions 7 years ago at a different custodian. They transferred their IRA to me 3 years ago and we continued taking 72 t distributions. The client now wants to stop taking these distributions. Does the 5 year rule start with the original IRA or with the new IRA we established?
Thanks.
Permalink Submitted by Alan - IRA critic on Tue, 2016-06-28 17:24
The plan must continue to the longer of 5 years or age 59.5. If the longer of those two dates has passed, the plan ended on that later date. If that date has not yet arrived, since client has already taken at least 5 years worth of distribution, they have an option to take out nothing in the final calendar year and not bust the plan. Otherwise, they will bust the plan and owe penalty and interest retroactive to day 1. They also have the option of a one time switch to the RMD method, and that would reduce the distribution considerably and avoid busting the plan. The 5 years does not start anew with the transfer of custodian. It runs from the date of the first 72t distribution. Has client reached 59.5 yet? Would help to know the end date (modification date) of the plan to determine exactly where she is with this, since she apparently has already met the 5 year requirement.
Permalink Submitted by Josh Harmon on Tue, 2016-07-26 17:34
I have a client who is 56. We are planning on starting up 72(t) withdrawals this year in November. If they take money out in November of 2016, can they take next year’s distribution any time in 2017? And would the plan be finished as of 1/1/2021, or would it be locked down until November, since that’s when we started taking distributions? In other words, does the IRS just look at 72(t) based on the calendar year?
Permalink Submitted by Alan - IRA critic on Tue, 2016-07-26 18:06
This would be a 5 year plan. The distribution total for 2016 could be either a full annual or 2/12 of the annual calculation. For 2017-2020, the only requirement is that the full annual distribution is completed, but the dates of these distributions can be anytime in the calendar year. For a 5 year plan, the plan will end sometime in November, 2021. It does NOT end in January 2021. For 2021 through November, if 60 months of distributions have been withdrawn by the end of 2020, then NO distributions can be taken in 2021 before the plan ends in November. But if only 2 monthly distributions were taken in 2016, then 10 months worth must be taken out in 2021 before the plan ends. In other words, 60 months worth needs to be distributed during the plan term. Yes, a 72t plan is basically a calendar year plan, but these rules can still be confusing. In a noted case Arnold v Commissioner, Arnold thought his 5 year plan was completed after taking 60 months worth, and then he took out more and the IRS busted his plan because of the additional distribution before the 5 years from the date of the first distribution passed.