72(t) Issue
Had a client execute a 72(t) payment schedule with their IRA in 2016. The accountant never explained away the penalty, and the client has paid the penalty every year since 2016. They have stuck to the payment schedule, so the 72(t) schedule is still intact. The CPA said that they could re-file for 2019-2022, but are past the point of re-filing earlier years. Checking to see if there is a solution that the CPA is unaware of.
Thanks!
Permalink Submitted by David Mertz on Thu, 2023-07-27 19:34
Permalink Submitted by Janie Williams on Sun, 2023-07-30 17:19
By 72(t) payment, I’m assuming you mean SOSEPP as there are several 72(t) exceptions to the penalty. Have you checked to see which method was used to calculate the amount of the payments to make sure one of the three methods was used, and the payments were correctly calculated. I can’t just say I want X amount of dollars each year for it to qualify for the penalty exception. The custodian may know something you don’t, which is why it was coded 1 instead of 2. I’ve had a few of these the adviser set up only to tell the TP to tell the tax preparer “72(t)” as if it was some kind of mantra. In checking specifics of the payments, the distributions did NOT qualify as a legitimate 72(t)(2)(A)(iv) exception to the penalty.
Permalink Submitted by Alan - IRA critic on Sun, 2023-07-30 18:12
Most custodians do not wish to get into “underwriting” the accuracy of the 72t calculations or to help manage the plan, some of which can be very complex involving more than one IRA account. Therefore, only a few custodians will issue a 1099R with the Box 7 code as 2 (penalty exception). That forces the taxpayer to claim the exception by attaching Form 5329 and showing exception code “02” as the justification for the penalty exception. If the code is left as code 1 (early distribution), the IRS will expect the penalty to be paid since they won’t know about the 72t plan.
Permalink Submitted by Janie Williams on Sun, 2023-07-30 20:07
I understand that, but note the statement says custodian “MAY know something….” Any time you use the SOSEPP exception to the penalty, you need to be sure the calculations are correct, or else it fails, and the penalty is applicable.