72(t) Stub Year
1.) A 72(t) was commenced in Nov. 2017 using the fixed amortization method. In the initial stub year of 2017, 2/12ths of the annual amount was distributed as a prorated payment. Must the final year payment in 2022 (individual is over age 59.5) reflected a prorated amount for 10/12ths or should it be the annual amount calculated in a non-stub year.
2.) The end of the 60 month SEPP will occur in Nov. 2022. Can a regular withdrawal safely commence as of Dec. 2022 or will this mess up the 1099-R, unless the custodian distributes a second 1099-R to cover any distributions paid after the end of the SEPP period?
3.) Does it matter if 72(t) payments are distributed monthly in the stub year and then annually in all other years? Section 72(t)(2)(A)(iv) seems to suggest SEPP “not less frequently than annually” in Rev. Rul. 2002-62.
Thanks!
Permalink Submitted by Alan - IRA critic on Wed, 2021-08-25 02:38
Ideally, the 2022 distribution would be 10/12 of the annual, resulting in total distributions of 60 months worth. If age 59.5 arrives before 5 years from the date of the first distribution, the plan is known as a 5 year plan, and in such a plan it is a little safer to not pro rate year 1. However, if the person distributed a full annual in 2022 making for 62 months worth, I doubt that the IRS would bust the plan.
Once the plan reaches the modification date, taxpayer is free to distribute any amount they wish after that date because the plan has ended. Normally, the custodian will code any distributions after age 59.5 as normal (code 7), and prior as Code 1 (early), and the taxpayer must file a 5329 to claim the SEPP exception. So taxpayer will probably get two 1099R forms in the year they reached 59.5, but that is not an issue, except that the 5329 only needs to address the Code 1 total. But none of this effects the plan itself, just the tax reporting detail. Put differently, there are only a few custodians who still underwrite the plan accuracy and would provide a Code 2 prior to 59.5. They prefer to leave tax reporting between the taxpayer and the IRS.
Your reference means that distributions must be taken every year, and the amount from one year cannot be carried over to the next. The IRS does not care what the distribution pattern is within a year, all they are concerned with is the 1099R total reflects a SEPP distribution, being either a full annual or a pro rated annual by the month in a stub year.