72t error

Submitted by Rob Rod on Thu, 2023-06-29 16:46

We setup a 72t on 01-25-23 but discovered the incorrect distribution on 02-01-23 of $122.90 due to Dec 2022 year end market value of $25,355.20 and deactivated it on 02-03-23. We created a new and correct 72t on 02-03-23 using adjustment to account balance in Jan 2023 of $493,793.81 (early retirement pension 54.5 yrs) for new distribution on 03-01-23 of $2516.35. Is this plan considered busted and should we just make it a stub year and distribute a total of $30,196.20 for the year, either single payment or monthly. And continue monthly in 2024 (does it really matter how we take distribution frequency.) Or add the difference from Feb 2023 distribution ($2516.35 less $122.90 equals $2393.45). Which is the better way to resolve this. The custodian Fidelity didn’t want to add back into the IRA and didn’t know about the 60 day rollover and now it’s been 5 months. Thank you.



Submitted by Alan - IRA critic on Thu, 2023-06-29 19:16

  • Is the documented calculation for the 1/25 distribution correct or not? Was the client over 54.5 on 1/25? If so, this is a 5 year plan and the total annual distributions for 2023-2027 should be the same with no distribution in 2028 prior to 1/25. The IRS only cares about the 1099R, not the number of frequency of distributions. Most likely, if would be easier to simply adjust the remaining payments this year to generate the correct annual total for the year. 
  • If client wants automatic monthly payments, they should be made in the middle part of each month, never on the first or last day of the month since year end holiday distortions could easily result in a busted plan. The 15th of the month is ideal, as there is time to check the annual total right after the Dec 15 payment to make sure it is right.

Submitted by Rob Rod on Fri, 2023-06-30 04:42

The documented calculation created 1/25 was initially incorrect for 2/1 distribution and a corrected one made 2/3 for distribution 3/1. So will just make it a stub year total equal annual distributions 2023-2027, 5 year plan. But client turns 59.5 on 1/11/28 so does that mean a full annual distribution must be made on 6th year for 2028? Thanks.

Submitted by Alan - IRA critic on Fri, 2023-06-30 14:42

  • Yes, this is a 5 year plan. Therefore, the full annual amount should be distributed in each year 2023-2027, and nothing in 2028 until after the plan ends 5 years from the date of the first distribution. After that, there are no restrictions and client will be over 59.5.
  • Again, the correct calculation documentation should be retained and the initial incorrect documentation discarded. The first actual distribution made in January or February can just be treated as a portion of the correct 2023 distribution total. Of course, this can only be done if the error is corrected promptly in the initial year. The client also has the option of treating the first distribuiton as an early distribution subject to penalty (not a busted plan, but treated as no plan), and starting the initial plan with the next distribution. But if that next distribution was in Feb rather than January the Jan interest rate could be used and the initial balance used in the calculation would have to be after the initial distribution, so the 12/31/2022 year end balance could not be used. 

Submitted by Rob Rod on Fri, 2023-06-30 17:15

Thank you very much!

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