72(t) and Carona

Submitted by James Lavorgna on Mon, 2020-11-30 17:38

Can anyone elaborate on the ramifications of a client taking advantage of the $100,000 withdrawal provisions for 2020 and then using the 72(t) provision for 5 years starting in 2021? And either paying back the 100k vs paying the tax.



Submitted by Alan - IRA critic on Mon, 2020-11-30 18:38

  • The IRS in Notice 2020-50 indicated that taking a CRD will not bust an existing 72t plan, however there is no mention regarding whether the 72t plan IRA can accept the repayments or they must be paid into an IRA outside the plan. However, you are asking about starting a 72t plan after the CRD has been distributed in 2020. In that case, the IRA balance on which the calculation is made must be the actual account balance which could include a repayment made before the date on which the account balance is determined. Repayments done after the 72t calculation is done should be made to an IRA outside the 72t plan to avoid the risk of these repayments being treated as contributions that would bust the plan.
  • The main factor in repaying or not repaying is whether you need the money currently or can afford to replace the money tapped as a CRD to preserve your retirement assets. If you do not repay, then you may need to generate the funds to pay the taxes from your 72t distribution, since you could not increase your distribution to pay the taxes without busting the plan. Another alternative is to make the one time switch to the RMD method that will reduce your 72t distributions and the tax bill on those distributions and use the CRD money not repaid to provide liquidity for expenses including tax payments. 
  • Perhaps the 100k CRD could also be used to either reduce or eliminate the amount needed through a 72t plan. SInce the decision starts with the CRD and the amount of the CRD, and there are many moving parts to consider, a detailed plan should be drawn out before starting the 72t plan and determining the amount needed in 72t distributions. That plan should include the repayment plans for the CRD, the amount, the timing of the repayments, and repaying into an IRA outside the 72t plan with exception of repayments that can be made before determining the IRA balance from which to calculate the 72t distribution.  Note that repayments done after April could trigger the need to amend the 2020 return for a refund.

Submitted by James Lavorgna on Tue, 2020-12-01 15:25

Does this change if the CRD is from a 401(k)?

Submitted by Alan - IRA critic on Tue, 2020-12-01 15:57

No. Assuming the 72t plan is from an IRA, a 401k CRD could be repaid back to the 401k with no effect on the 72t. But if repaid to an IRA it must be to an IRA account outside the 72t plan.  The CRD could also be used to access 100k without penalty and therefore postpone or eliminate the need for a 72t plan, or perhaps reduce the amount needed from a 72t plan.

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