Can I break a 72t payment in IRA #1 and then start a new 72t in a different 2nd IRA account during the same calendar year? I am aware of the penalty for stopping the payment on IRA #1. I’m more concerned about the ability to start a new 72t payment in IRA #2 in the same calendar year as breaking the 72t in IRA #1.
The current IRA #1 was placed under a 72t 4 months ago. It has all of my asset in it. I want to break the current 72t and move all the assets into a new IRA #2 except 100k which will remain in IRA #1. I will then start a new 72t in IRA #2. That why I will have access to funds in the event of an emergenc.
You could do that, but of course if you expected to need emergency funds before the plan ended you should have done this before starting your current plan. However, doing it now will provide more insurance against busting your new plan later on. Further, due to increased interest rates and being another year older this year than last year, your new calculation along with a possibly increased account balance from gains (less what you took out) may result in your new calculation being not that much less than your old one. If you haven’t taken any distributions yet in 2018, you would simply pay the penalty on the distributions you took out in 2017 and start a new plan with IRA 2 when you want to. SInce the IRS does not even know you had a plan and your penalty does not include any distributions taken out before 2017, you just pay the penalty and do not override the code 1 you probably will have on your 2017 1099R.
Sounds like sound advice. Only one proble, my ira custodian coded the 1099 for 2017 with code 2, known exception. Therefore won’t the irs know I started a 72t in 2017? The current custodian is also telling me I can’t stop and start a 72t in the same year. I can’t find anything on the irs website that supports that. They won’t tell me if it’s their policy or an irs rule. Hence the question, can I start and stop a 72t in the same year? If it’s an irs rule, does it make a difference if it’s broken in one Ira and then a new 72t is started in a new Ira?
Very few custodians provide the 2 coding, but you are correct that the IRS would likely see it as indication that you started a 72t plan. It will also now be more difficult to report a voluntarily busted plan. You would have to add the amount of the 10% penalty on line 4 of Form 5329 and include an explanatory statement why you are doing that. That’s more work than having a code 1 and simply paying the penalty.
Thanks so much for your help. I edited my most recent post a little to give you a little more informatio.
Can you answer one more question for me? Is it against irs rules to stop a 72t and start another one in a different account in the same calendar year? In other words will the second 72t be valid for the irs? I edited my last post from. 1-31-2018 if you need more details. Thanks
It does not violate any IRS rules. You could even bust a plan and later start another plan using the SAME IRA account. However, that is more likely to cause confusion with the IRS that would result in an inquiry. To reduce confusion it is better to do a direct transfer from the first IRA to a new IRA and start a new plan there. It is also preferable to start the new plan in the calendar year following the old plan, but neither of these suggestions are requirement. They just provide optional separation of the two plans.
Can you stagger 72ts that start in different years so that each IRA has its own 72t payment plan? So if I have 5 different IRA accounts can I calculate a 72t payment plan on IRA #1 for 2019 and calculate a new 72t plan with IRA #2 in 2020? I have a client who is rolling out of an ESOP over a 5 year period. Thanks!
Yes, this is legal, although it’s a SEPP structure that the IRS rarely sees and may not understand. Whenever you have multiple 72t plans you must keep clear records and should thoroughly document how you calculated the distribution for each independent plan, because the IRS may well send you an inquiry. Of course, you must keep each IRA account totally separate from the others, no transfers between them or distributions that are not 72t distributions. You should be able to file a single 5329 for all active 72t plan distributions to claim the penalty waiver. Of course, this 5 year roll out eliminates the chance to utilize NUA because only the last year will constitute a lump sum distribution, but the prior distributions will be intervening distributions unless you have a new triggering event such as reaching 59.5,
Permalink Submitted by Alan - IRA critic on Wed, 2018-01-31 01:48
Yes, you can do that but the challenge is to do it in a way that does not produce an IRS inquiry or added scrutiny of your new plan. Do you plan to transfer some of IRA 1 to IRA 2 before starting the new plan in order to beef up your balance to enable your new distribution to be large enough? Why is the current plan being busted and what will be different about the new calculation?