EARLY WITHDRAWAL PENALTY
WHAT IS THE MAXIMUM SCHEDULE PAYMENT TO AVOID A 10% PENALTY ON EARLY WITHDRAWAL PRIOR TO AGE 59 1/2 ON A IRA FOR A FEMALE AGE 51. THE PAYOUT PERIOD IS 10 YR AND THE AMOUNT IS $125,000.00. IS THERE A CALCULATOR AVAILABLE FOR FUTURE USE?
EARL CREER
Permalink Submitted by Alan Spross on Wed, 2009-07-15 20:04
Attached is a link to the calculator on the 72t website. Note that payments beginning at age 51 must continue until age 59.5. It is best to use the amortization or annuitization methods, as there are fixed dollar distributions requiring only one calculation at the beginning of the plan. There are also other references documents on this site regarding various letter rulings and requirements to successfully execute such a plan. Since the cost of busting a 72t plan is high, the taxpayer needs to understand what they must do and what they cannot do to protect the validity of their plan:
http://www.72t.net/SeppPaymentCalculator
Permalink Submitted by Clyde Wolf on Wed, 2009-07-15 20:06
Earl,
Are you inquiring about a 72t distribution?
Permalink Submitted by Clyde Wolf on Wed, 2009-07-15 20:07
Nevermind,
Alan-oniras’ response was not there when I posted.
Permalink Submitted by Earl Creer on Wed, 2009-07-15 20:29
WE WERE UNABLE TO COME UP W/ A FIGURE FOR DISTRIBUTION W/OUT 10% PENALTY USING THE 72T CALCULATOR. I NEED ADDITIONAL HELP IN DETERMINING WHAT DISTRIBUTION AMT IS AVAILABLE WITHOUT PENALTY.
Permalink Submitted by Alan Spross on Wed, 2009-07-15 21:42
If all she has in available retirement accounts is 125,000, and since a 72t plan will only produce around 6,000 per year, I take it that she needs much more than 6,000 per year?
Permalink Submitted by Earl Creer on Thu, 2009-07-16 18:45
for alan-oniras, is there anyway that i can speak to you on phone regarding this question?
Permalink Submitted by Alan Spross on Thu, 2009-07-16 19:22
Sorry, no. I don’t take calls or contact outside of forum posts.
Penalty exceptions for equal payments prior to 59.5 are all based on payout based on life expectancy, and 10 years falls far short. There are other exceptions to penalty if she has certain expenses such as medical, higher education, first home, disability or health insurance premiums while on unemployment. These might combine for at least part of the annual distributions to avoid the penalty without a qualified 72t plan. It is best not to start a 72t plan when there is a good chance that the distributions will not be enough to cover current needs, since the plan then ends up being broken. 125,000 is too small an amount to base a plan on unless there are other sources of income such that the 6,000 or so is just a supplement to the other income.
Permalink Submitted by Earl Creer on Thu, 2009-07-16 19:49
Thank you very much for your help. The other income is $1,375.00 per month from lifetime retirement pension from former employment & $5980.00 net W-2 income from present employment as well as $820.00 of real estate rental income, plus the $125,000.00. So what I need to know now is the maxium amount that is available based on the info listed above. Also is this period certain or lifetime? If it is period certain, please give me the amount of the period.
Again, thank you very much for all of your help!
EC
Permalink Submitted by Alan Spross on Thu, 2009-07-16 21:02
A 72t plan is not an actual annuity and therefore period certain concepts do not apply. The plan must continue for the longer of 5 years or until age 59.5, so in this case it must run until 59.5, around 8 years or so. Then the plan stops and the IRA owner can take further distributions if they want to or they can stop until RMDs must begin at 70.5.
My calculations are that this IRA owner, based on age 51 (age must be the age she will be at year end, not right now) can take an annual distribution of 5.008% of the beginning balance of the IRA account, which would be $6,260 per year without penalty. She must take out exactly that much, no more and no less until she is 59.5. This figure is based on a receipt date for the first distribution in either August or September. She cannot receive it is July, or the amount will be less due to a lower interest rate applying for July distributions. Again, the annual distribution must be based on the exact balance, not a rounded balance. She could use a month end statement for May, June or July to determine this balance, and there can be no distributions or contributions to the IRA between the date of the balance used and the first 72t distribution date.
The IRA custodian may not code her 1099R with the exception code in Box 7. If that happens, Form 5329 is attached to the return and she claims exception #02 in the box to eliminate the 10% penalty. She can take distributions monthly, quarterly or in any combination as long as the exact annual amount is distributed. If she starts in August, she has a choice of taking out the full annual amount (6,260) or 5 months worth of 2,608 for 2009. Future years must be exactly 6,260 until the plan ends.
Because an error carries a severe retroactive penalty plus interest, you might suggest getting professional assistance setting this up.
Permalink Submitted by Earl Creer on Thu, 2009-07-16 21:59
alan-oniras-
Thanks again for your help! You suggested that I seek outside help, could you possibly recommend someone or company for this assistance.
earl
Permalink Submitted by Alan Spross on Thu, 2009-07-16 22:24
You should be able to find someone local unless you are in a very rural area. CPAs are more likely to be able to help, but EAs and some other tax preparers can handle it or refer you to someone locally, known to specialize in this area. Some large IRA custodians can also be helpful in setting up the plan. It is not required, but is recommended that the IRA custodian know about and be told about the plan and sometimes they even check the calculations.