Question on 72Q

I have a client who has two Nonqualified annuities and I would like to take withdrawals out of one of them.
I want to use both annuity values to calculate the 72q withdrawal amount then take the withdrawal from one of the contracts.
Can I do this?



Yes, the same basic rules apply to NQ annuities that apply to IRAs. You can aggregate the two annuities but you must be careful with respect to both accounts not receiving any contribution or distribution that is not part of the required SEPP distribution. Each annuity has it’s own cost basis, but you will probably be receiving the taxable earnings first before getting to the investment in the contract.

Hi there,I have a client with a Non Qualified annuity and 72q distributions in place. She is only 49 years old and has been receiving distributions since 2020 (4 distributions so far) She needs to take an additional distribution for the year 2023 (pay taxes and penalty for this one) and then continue with her regular yearly distributions.  Is this even possible?  

No, it would bust and terminate the 72q plan and she would owe the penalty plus interest on all distributions back to 2020. Generally, starting a 72t or 72q plan in your 40s tends to lead to a busted plan, probably even more so in times of high inflation because the payments turn out to be inadequate at some point. At least this plan has not been in place too long and busting it now costs a lot less than 5 years from now.

I though as much but wasn’t certain, thank you for confirming.  And yes, that’s what we are doing, busting it now and giving her more flexibility with her money.  One more question: Do we need to complete a special form to bust the 72q or simply to stop receiving the distributions? 

  • While it appears that the 72q plan was not actually busted in 2022, the best choice might be to file Form 5329 with the 2022 return reporting a voluntary termination of the plan per IRS PLR 1999 09059. The 10% penalty will be due on the taxable portion of all distributions since the plan began in 2020. The IRS may bill late interest on the portion of the penalty that applied to years prior to 2022. This will end the plan as of 12/2022 and client can then start fresh with no plan in place as of 1/1/2023. An explanatory statement must be added to Form 5329 (Part I) listing the taxable portion subject to the penalty for each year. 
  • The other alterntive is to file 2022 as still compliant with no penalty, and defer reporting of the busted plan to 2023 after the distribution exceeds the allowed amount. This more common approach will result in payment of the penalty a full year later and therefore more late interest will eventually be due.

Add new comment

Log in or register to post comments