72(t) Distribution – Help…
I have a client that we did a 72(t) distribution when they were 58 years old and he now needs a significant distribution out of his IRA. I know this will break the 72(t) and will cause the 10% penalty on the distributions.
Will this be only on the distributions prior to 59 1/2 or all distributions during that five year window??
Does anyone have any suggestions (other than home equity line or borrow from a different source) as to how we can get money out of the IRA without breaking the 72(t)?? He is utilizing the money for his childs wedding…
Thanks
Permalink Submitted by Alan Spross on Tue, 2008-07-01 20:40
One benefit of a late 72t plan is that if it is busted later on the retroactive penalty and interest ONLY apply to distributions that were actually made prior to age 59.5. Payment of this penalty will also terminate the 72t plan, so there is no need to attempt to resume it to complete the 5 year requirement.
No easy escape route here other than borrowing. I assume the 72t comprises his entire IRA balance and there is no other retirement plans available such as an old 401k.
In those very few cases where the IRA has earned huge gains, the one time switch to the RMD method could actually generate an allowed increase. But this is highly unlikely in this market, and the one time switch usually results in a sizeable decrease, not an increase. So only take the time to check that out if he has had a huge gain in the 12/31/07 balance over what the initial plan balance was.
Permalink Submitted by David Sauer on Tue, 2008-07-01 21:01
So you are saying that if in the current year (he is now age 60) we take a larger amount than 72(t) amount that the distributions prior to age 59 1/2 will retroactively be charged the 10% penalty but the distributions after 59 1/2 will not receive the 10% penalty…
Correct??
Thanks….
[quote=”[email protected]“]One benefit of a late 72t plan is that if it is busted later on the retroactive penalty and interest ONLY apply to distributions that were actually made prior to age 59.5. Payment of this penalty will also terminate the 72t plan, so there is no need to attempt to resume it to complete the 5 year requirement.
No easy escape route here other than borrowing. I assume the 72t comprises his entire IRA balance and there is no other retirement plans available such as an old 401k.
In those very few cases where the IRA has earned huge gains, the one time switch to the RMD method could actually generate an allowed increase. But this is highly unlikely in this market, and the one time switch usually results in a sizeable decrease, not an increase. So only take the time to check that out if he has had a huge gain in the 12/31/07 balance over what the initial plan balance was.[/quote]
Permalink Submitted by Alan Spross on Tue, 2008-07-01 21:54
Right.
Only the pre age 59.5 distributions will be subject to the penalty. In addition the IRS will levy interest on the penalty based on the date it would originally have been due.
Taxpayer will need to file a 5329 to report the penalty on the funds owed and also claim the exception to penalty on fund not owed if the IRA custodian code all the distributions as “early”. That is probably what will happen this year. Some custodians do not even recognize the 72t and that forces the taxpayer to file a 5329 even when they do not bust the plan.