72T Distribution Question

Submitted by Nelie Cruz on Tue, 2021-04-06 20:26

I am turning 55 on August of this year, 2021. I would like to start SEPP or 72T distribution in January next year (2022). When will it end? Will it end on January 2026 or January 2027? I am asking for the exact date on when will it end as I would like to take more money once my 72T ends. When is it safe for me to take more than the equal yearly payment that I will take for 5 years?

Or if you can advise me, what month of the year should I start my 72T distribution? Is January ok? Or should I start it on August, my birth month?



Submitted by Alan - IRA critic on Tue, 2021-04-06 21:52

Your SEPP will be a 5 year plan since you will reach 59.5 before 5 years is up even if you started the plan this month. As such, your plan will end 5 years after the date of your first distribution as reflected on your IRA statement. This will be a couple days before you actually received that distribution. Add 5 years to that distribution date for your plan “modification” date, and then add a couple more days for a safety margin. You can then distribute as much or as little as you wish.
With a 5 year plan started 1/2022, your plan ending date will be in Jan, 2027. Take out a full annual distribution in 2022-2026, and take out nothing in 2027 until after your plan ends.
You can start the plan anytime you wish, but since this will be a 5 year plan regardless, you should only take out 5 years worth of distributions. If you started the plan soon, you would take out a full annual distribution in 2021-2025, and nothing in 2026 before the plan ends. The IRS will bust a plan in which you do not wait the full 5 years before taking out a “non SEPP amount”. 
If you start the plan later this year and do not need the full amount, distribute the full amount anyway and save what you do not need right now as insurance against busting the plan later on. 
I assume you plan the SEPP from your IRA. But if the funds are still in a 401k right now and you retired this year, you may not need a SEPP. The penalty does not apply for early distributions you take directly from a qualified plan from which you retire anytime in the year you reach 55 or later. But if you qualify for that penalty exception and the plan does not provide discretionery partial distributions till 59.5, the value of the waiver is impaired, and you would then roll the 401k over to an IRA and utilize the SEPP. Do not attempt a SEPP directly from a 401k plan even though it is legal, since you do not have full control over a 401k,

Submitted by Nelie Cruz on Tue, 2021-04-06 22:20

I am planning to do the 72T on my IRA account. I have 401k but I lost my job last year when I was only 54 years old. When you said take out nothing in 2027, does this mean that I cannot take any distribution for the whole year of 2027 to be safe. Or can I take any amount from March to December of 2027?  How do you calculate the yearly payment? I have read that there are 3 methods. Which method is the best or the safest?  Thank you for your quick reply. I really appreciate it!

Submitted by Nelie Cruz on Wed, 2021-04-07 19:11

On the annual payment, is it better to have the federal and state taxes deducted so I will have the payment net of taxes? Or should I get the payment in full and just pay the taxes later? Hoping for your reply soon. Thank you so much!

Submitted by Alan - IRA critic on Wed, 2021-04-07 19:23

Do not take anything out in 2027 until the 5 year anniversary of your first distribution has passed. After that you can take distributions as the plan will have ended and you will be over 59.5 and therefore beyond the penalty years. The best method is the fixed amortization method because it yields the highest distribution per dollar of account balance. This is also a fixed annual amount and only needs to be calculated at the start. As for your annual distribution amount, you can take it as a single distribution or split it up into multiple distributions such as quarterly. If you schedule automatic periodic distributions, aim for the distribution date to be in the middle part of the month, not the first 7 or last 7 days of the month to avoid year end distribution failures that would bust the plan. You can also change your distribution pattern from year to year. The key requirement is that the 1099R issued by the custodian exactly equals your calculation. Finally, you can use withholding if you wish instead of quarterly estimates, just remember that the gross distribution before withholding is the figure you need to carefully track.

Submitted by Nelie Cruz on Thu, 2021-04-08 16:43

Before the end of this year or early next year I am going to ask for your help or clarificattions again when I calculate my annual payment, to make sure that I will have the correct amount.  Another thing, the IRA custodian told me that they will use code 1 and not code 2 on the 1099R form when I asked him what code he will use. I know this is not the right code for the 72T distribution. But they are adamant that this is the code that their company will use. What should I do to correct this?  Thanks again!

Submitted by Nelie Cruz on Thu, 2021-04-08 16:43

Before the end of this year or early next year I am going to ask for your help or clarificattions again when I calculate my annual payment, to make sure that I will have the correct amount.  Another thing, the IRA custodian told me that they will use code 1 and not code 2 on the 1099R form when I asked him what code he will use. I know this is not the right code for the 72T distribution. But they are adamant that this is the code that their company will use. What should I do to correct this?  Thanks again!

Submitted by Alan - IRA critic on Thu, 2021-04-08 16:58

Most custodians will not provide exception code 2 on the 1099R for a SEPP plan because they do not want to “underwrite” the factors used in the calculation. The solution is simple. Just file Form 5329 Part I and show exception code “02” on line 2. The IRS expects to see this form for SEPP plans and there is no evidence that attaching the 5329 leads to more IRS inquiries or audits of the plan.  Rough guess is that at least 80% of taxpayers will have to file the 5329 to report SEPP distributions.

Submitted by Nelie Cruz on Fri, 2021-04-09 19:03

Thank you so much! I really appreciate all your help!

Submitted by Nelie Cruz on Mon, 2021-04-19 17:09

I have several IRA accounts. In setting up the 72T distribution, do I need to use all of my IRA accounts in order to calculate the annual payment or should I just use one specific IRA account for the calculation of the annual payment and leave the other IRA accounts as non 72T account? 

Submitted by Nelie Cruz on Mon, 2021-04-19 21:08

In my IRA account that I am planning to use as my 72T account, I have 2 CD’s with 3 month maturity date. And which I roll over every 3 months that they matured. Once I have I started the 72T distribution, can I continue investing them in a 3-month CD or do I need to stop re investing them into CD’s once they mature. I understand that I cannot make changes to my 72T account one it started. Is investing to  CD’s considered a type of change?

Add new comment

Log in or register to post comments