Stopping a 72(t) Dist trying to get around 10% penalaty
I have a brain child of a client who started a 72(t) program in 8/2007 ($860 Gross monthly). She has a brilliant idea of taking a $50k distribution to put down as a down payment for her grown son’s house. She sees it as a really good “Investment”.
I am trying to stop the 10% penalty hemmorage as much as I can.
Do you think this will work?
1. Recharacterize all previous distributions, and everything YTD, and her big withdrawal as premature instead of at 72(t)s
2. Have her file a 1040x to reflect the 2007 penalty
3. Transfer the remainer to a new IRA (so its clean) and restart a 72(t) from the new IRA?
I am trying as best I can to reduce or elimate the 10% Early Withdrawal penalty from future withdrawals. Or do you think a new IRA is needed?
Permalink Submitted by Alan Spross on Fri, 2008-05-16 03:43
A well thought out strategy, but I do not think it will work. 2008 is the year of actual plan modification, and the total transfer of the balance in the SEPP IRA to a new account just results in the new IRA being a continuation of a plan busted by the 50k distribution.
Granted, PLR 1999 09059 resulted in approval of a taxpayer who voluntarily busted their plan as of the end of 1997 because the wanted a grossly larger distribution from that point on. So they filed a 5329 to bust the plan in 1997 and started the new plan in January 1998. The penalty did not apply to 1998, only to 1997 and prior. However, that is not the case here since she cannot incorporate the large distribution into a new plan for 2008 that will continue. Therefore, she is stuck with the penalty for all distributions from 8/07 through 12/08 regardless of the IRA account number.
That said, it appears that up to $10,000 of her 2008 distributions might qualify under the first home exception if she has not previously applied those limits. A first home can be that of a child if the home otherwise qualifies as that child’s first home. The result would be that the early withdrawal penalty would apply to 8/07 through 12/08 distributions less up to 10,000. She could then start a new 72t plan effective January, 2009. Finally, given her tendency to bust these plans before they even get underway, you have a challenge trying to get her to seriously think how much of a distribution she will need from January to her new modification date.