72t – halting the process

Submitted by Andrew A. Serafini, CFP on Fri, 2009-02-06 21:48

Hello…

I did notice a forum about halting 72t in a previous posting, but I was hoping to be a little more specific about our case and make sure I’m thinking clearly.

I have a client whose DOB is 11/4/1949 – she turns 59 1/2 on 5/4/2009. She initiated her 72(t) by way of annual lump sum withdrawals via the amortization calculation in September of 2003. In 2008 she switched to the life expectancy calculation. If I understand the rules correctly, her calculcation from the custodian for 2009 can now be divided into a monthly amount, and she will only be required to take a withdrawal in 2009 equal to the monthly amount times 4 (Jan, Feb, Mar, and April).

Does this sound accurate? Please email your reponse to my associate Doug Nigh at [email protected]. Thanks!!



Submitted by Alan Spross on Fri, 2009-02-06 22:04

Yes, that is correct.

The IRS should also find that taking nothing in 2009 prior to 5/4 is also acceptable since the 5 year requirement has already been satisfied and 59.5 is attained prior to year end. But 1/3 of the new RMD annual amount would be the least likely to trigger any questions.

Submitted by Andrew A. Serafini, CFP on Mon, 2009-02-09 13:43

Alan – I was unaware of the rule that allows you to halt the withdrawal prior to 59 1/2 if you turn that age in prior to year end. By chance could you point me in the direction of the publication or code language that we could use for reference?

Thanks again for your help!!

Submitted by Alan Spross on Mon, 2009-02-09 18:51

Andy,
There really is no rule, IRS Reg, or wording in the tax code to define what is “substantially equal” or “reasonable”.

Most conclusions regarding SEPP planning have arisen from a couple decades worth of IRS letter rulings, and there are none that I am aware of that directly address final stub year options when age 59.5 determines the plan modification date.

There are rulings such as “Arnold vrs Commissioner” that clearly define the 5 year period, when it applies.

In reality, the IRS has been extremely flexible with final stub year options, and in a practical sense have busted very few plans. Those that have been busted have made an obvious modification that common sense would determine not to be equal with the prior years.

The conclusion of final year flexibility comes from Bill Stecker, who is an authority on SEPPs, has written a book, and has a practice serving the needs of SEPP plan participants. He has also been in frequent contact with the IRS in matters related to SEPPs.

I understand that this is not very reassuring with respect to the options of taking -0- out this year prior to 5/4/2009. But Stecker’s opinion is all that I have to support this contention.

Another compromise would be to change to the RMD method (permitted one time switch) effective 1/1/2009, and take out 1/3 of the annual amount. This would be much less than taking out 1/3 of the original method annual distribution.

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