72t Withdrawal
We have a client that has a 72t account. The 72t began in 2005 and has not had any monthly deviations since inception. We just received a Child Support Collections Order to Withhold from our law department for the state of California. They have put a freeze on this account and the order is to make payment by August 25, 2008 in the amount of $12,977.36. We as a firm have the obligation to cut a check from the client’s account to uphold the order.
My question is; Does the IRS grant any exceptions based on these types of situations (Court Ordered payments) where the client is NOT PENALIZED back to the 1st 72t dollar?
Pls advise.
If you wish to contact me for further information, my toll free number is 877-482-7277 pls ask for Russ Wixon or Gretchen Taylor. Thank you.
Permalink Submitted by Alan Spross on Fri, 2008-08-15 03:13
Unfortuneately, under RR 2002-62 the only exceptions for which a plan can be modified without the retroactive penalty are death and disability. The remaining options for this taxpayer are not attractive:
1) Consider the 12,977 as part of the 72t distribution thereby reducing the amount withdrawn for his own uses by that amount. If this amount will put him over the annual amount, then he could roll back any other distributions made to him within 60 days if his rollover option is open.
2) Consider any possible options to have the freeze order lifted by offering another type of settlement, perhaps via a loan. This would save the retroactive penalty and interest on the plan modification.
3) While highly unlikely, IF by chance his account balance has gained enough since inception, he could make the one time switch to RMD and that would increase his payout, saving the plan. There would have to be a substantial gain, since the RMD method usually cuts the payout around 40%.
In any event, there is no silver bullet to easily escape this situation.