72T Account Error
I ran into a situation where a client had about $700K in IRA balance, currently age 58 (not 59.5 until June 2024) and needed cash. We calculated the IRA value needed to generate the cash she needed so planner rolled $150K into another IRA and maintained about $550K in this IRA to process the 72T. Support staff processed distribution of $36K in December, but planner just realized it was accidentally processed from the small IRA not the one it was supposed to come from. Any ideas on ways to correct this mistake and avoid 10% penalty on the distribution? 60-day rollover is off the table as one was completed in April 2022.
Permalink Submitted by Alan - IRA critic on Wed, 2023-01-04 20:52
The 36k could be rolled into an employer plan if client is still working and the plan accepts IRA rollovers, or if that is not possible, the 36k could be rolled into a new Roth IRA as a conversion. The conversion is taxable but would avoid the penalty and the balance would then be in a more valuable type of IRA. The 72t plan would then have to be recalculated due to age change and opening balance from starting distributions in 2023. If a conversion is made, and if 700k is needed to fund the 72t distribution needed, client may have to start one plan for the reduced TIRA value and another for the Roth IRA. A 72t plan from the Roth IRA conversion would waive the 10% penalty for distribution of conversions in the first 5 years, and the Roth distribution would be tax free.
Permalink Submitted by Jessica DeBold on Wed, 2023-01-04 20:58
Alan, thank you! The client has separated from service so we couldn’t roll into employer plan, I already considered that. I didn’t think about the ROTH conversion option.