72t Rules and the devil in the details

I have a client setting up a 72t to start Sept 2023. We are using the single life, fixed amortization method. The annual withdrawal rate will be $38,367. DOB is 2/22/1968, which means his last payment will be in 2027 because that will be the 5th year of distributions and he will be 59 ½ in September that year. I have a question about the substantially equal payment plan rules. Can we send out the annual amount in the last 4 months of 2023, then divide the $38,367 by 12 months starting 2024 and still be in compliance with IRS rules? Then in 2027, will he be restricted to the $38,367 withdrawal up until he turns 59 1/2, then be able to withdrawal additional funds after at mark?

Thanks for your help understanding the devil in the details!



This will be a 5 year plan terminating in Sept 2028. It’s safer with a 5 year plan to avoid pro rating the first and last year’s distributions, therefore a full annual distribution for 2023-2027 is preferable. It does not matter when in each year the distributions are taken as long as the full annual amount of 38,367 is distributed by the end of each year and will be reported by the custodian on Form 1099R. Note that while the last distribution would be in 2027 bringing the total to 60 months worth, the plan does not end until 9/2028 and there should be no 2028 distributions until after the plan term has ended. Unlimited distributions are then allowed after 5 years has passed from the date of the first 72t distribution. Finally, if automatic distributions are to be set up in 2024, they should be made around the middle of each month to avoid the risk of a malfunction with the Dec or January payments which could bust the plan. Most custodians will code the 1099R as an early distribution (code 1) and client will then have to file Form 5329 each year to claim the 72t penalty exception code “02” on line 2. 

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