72t Distributions – Rolling Calendar Year basis
Can you please validate if a 72t distribution can be done on a Rolling Calendar Year basis? If so, what date do you use for the end of year balance? Would it be the day before the first distribution is made (i.e. if 9/8 was used would it be 9/7 ending balance for calculation purposes)? How does the IRS view this if rolling calendar year distributions overlap years, does it open you up to further scrutiny potentially? Are there any other things to consider if you choose this option vs the more traditional fiscal year?
Permalink Submitted by Alan - IRA critic on Thu, 2019-12-19 04:27
There is no definite guidance that a fiscal year 72t plan would not qualify, but it would be inviting trouble to set one up since it is not possible to predict how the IRS would react to this. Are you assuming that the person is already filing their 1040 on a fiscal year basis? Certainly, there would be extra scrutiny and much time just explaining the plan to the IRS. As current plans are constructed, if the first distribution is taken in June for example, the period through calendar year end is called a “stub year”. So is the final year when the plan modification date is either 5 years from the date of the first distribution or on the date the person reaches 59.5, if later. These stub year periods generally call for either taking the full annual distribution, a pro rated distribution by the month, or in the case of the final calendar year, no distribution as long as at least 60 months of payments have been distributed. Also, the account balance used to determine the original calculated distribution should generally be within 6 months of that first distribution and be a reasonable representation of the value of that account on the date of the initial distribution. I would guess that “reasonable” means no more than 15% higher or lower than the account value on the initial distribution date. Since many examiners at the IRS are not familiar with these plans, the taxpayer should attempt to keep the plan structure as simple as possible since doing otherwise invites scrutiny, and that often spells trouble.