72T and retired leo

Submitted by Steven Carr on Mon, 2021-03-15 16:01

I retired from law enforcement (Florida) at age 55 and after 25 years of service. I put my retirement fund into a local broker and have been happy until now. My accountant and advisor seems to have a difference of opinion regarding my withdraws every month and when I take a little extra out every once in awhile. So my advisor has me in a 72T account/ withdraw status with the IRS. He said If I take more out over my monthly amount I get hit with a 10% penality because Im not 59 1/2 yet. My accountant says I am exempt from that status because Im a retired Public Service( LEO). ( and can basically take out as much as I want. Who Is right????



Submitted by Alan - IRA critic on Mon, 2021-03-15 16:51

Does your plan provide for flexible partial distributions after retirement?  If so, and assuming the plan is an approved govt plan, you never needed a 72t plan in the first place. You could have retired as early as age 50 and all distributions directly from the plan would have been penalty free. The advisor might have missed that, or the plan DID NOT provide flexible annual distributions. 
If your advisor rolled over the plan to an IRA, from which most 72t plans are executed, the penalty free exception does not apply. Otherwise, it appears you have been in violation of the 72t plan in any event. If the distributions have been made directly from the govt plan, how has your tax return been filed to claim the exception?  If there has been a Form 5329 included, what Code shows on line 2?
Also, please provide your DOB and the date of the first distribution under the 72t plan.

Submitted by Steven Carr on Mon, 2021-03-15 16:58

My plan is titled  Trad IRA Guided Solutions Flex Fund. I think my first distrubition was around June 2017Line 2     01

Submitted by Alan - IRA critic on Mon, 2021-03-15 18:23

This is obviously an IRA account, and rolling over the govt plan to the IRA eliminated the PSO and separation at 55 penalty waivers and therefore was a major mistake. Neither of those penalty exceptions apply to IRAs, and it clearly states that in the IRS Form 5329 Inst for exception code 01.  The proper code for a 72t plan is “02”, but perhaps the accountant did not use 02 because he knew you were not limiting distributions to the exact amount of the 72t calculation. It appears that both the advisor and the accountant have made errors. If the IRS ever notices that a non IRA exception is being applied to IRA distributions, they could levy retroactive penalty and interest on all your early distributions back to 2017. Your 72t plan must last the longer of 5 years or to age 59.5, but any distributions after 59.5 are not subject to the penalty. 
In short, it sounds like the advisor messed up by recommending rollover to an IRA, but the advisor is correct about the penalty issues. The accountant is using a non IRA code to secure the penalty waiver, and I assume that has been the case back to 2017. 
NOTE: Should it come to that, and if you qualify for a corona virus related distribution per Notice 2020-50 and the CARES Act, then any amount you distributed from the IRA in 2020 (up to 100k) will be exempt from the 10% penalty, but you would have to file an 8915 E with your 2020 return. Finally, the first year you busted the 72t plan effectively ends the plan and you no longer have a 72t plan.

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