A client is taking 72t distributions from his IRA. In 2008 he had one month in which there was not enough cash in the IRA to meet the full 72t amount, so the custodian sent a check for the balance of the cash even though it wasn’t enough to meet the 72t amount. Can our client take a distribution for the remaining balance of what should have been distributed now and ask for a waiver of the penalty from the IRS, similar to a missed RMD?
There were plenty of other assets that if liquidated would have generated sufficient cash. So, will the client simply pay the 10% early withdrawal penalty on distributions taken in 2008? If not, what kind of penalties is the client looking at?
Unfortuneately, if a 72t plan is busted, the client will owe retroactive penalties and interest for all distributions taken since the plan started. A Form 5329 would be added to the 2008 return supplemented by a statement of the amount due for each year since the plan started. The IRS will bill out the interest due. Hopefully, this plan was not started too much prior to 2008.
Busting the plan in 2008 means he has no plan right now, and will have to start a new one. The old one cannot be continued. There are only a few days left this month in order to use the November interest rate and the rates after that have dropped considerably. That would result in a much lower payout per dollar of 12/31/08 account balance.
If the custodian knew this was a 72t plan, they should have warned the client about failing to meet the exact dollar requirement of the plan.
Permalink Submitted by Alan Spross on Wed, 2009-01-21 20:17
Dennis,
The following is copied from RR 2002-62:
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.03 Special rules. The special rules described below may be applicable.
(a) Complete depletion of assets. If, as a result of following an acceptable method of determining substantially equal periodic payments, an individual’s assets in an individual account plan or an IRA are exhausted, the individual will not be subject to additional income tax under 72(t)(1) as a result of not receiving substantially equal periodic payments and the resulting cessation of payments will not be treated as a modification of the series of payments.
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If all assets are distributed, then the 72t plan ends without penalty, and if the client has other retirement accounts that were not part of the 72t, he may wish to start another new plan. Note that this ruling deals with all plan assets, not just cash. The plan would be busted if assets remained in the plan and just the cash was distributed, and it sounds as if this might be the case here. To prevent a busted plan, all the assets must be distributed, and the value of in kind distributions must be known because the IRA custodian will have to show amounts on the 1099R.
Unfortuneately, if these other assets remained in the plan and the year ended with an insufficient distribution, there is no provision to make up that shortfall, and the plan has been modified (busted). If the last remaining assets were frozen, then there is reason to seek a letter ruling granting relief.