5 year rule on 72t election
I have a client who is 60 and receiving SEPP’s she no longer needs. She set up her payments on 11/28/2005. Has she satisfied the 5 year rule with 05 being year one and 09 being year 5? OR does she have to go to 11/28/2010 to satisfy the 5 year rule? As always–Thanks in advance for your help!
Permalink Submitted by mk foss on Fri, 2009-11-13 18:48
Good for you to catch this. This question was addressed in a court case – Arnold v. Comm. (111 TC No. 12) in 1998. The Tax Court said that the 5 year period begins when the Stream of Payments begin. In the case, someone took money outfor 5 years and had reached age 59.5 but was a month or so short of the anniversary date.
They had better wait another year before terminiating the payments.
Permalink Submitted by Alan Spross on Fri, 2009-11-13 21:00
A couple options might still remain to reduce the 2010 payments:
1) Do the one time switch to the RMD method effective 1/1/2010. This would result in a substantial reduction in remaining payments.
2) How much did she take out in 2005? If two monthly payments, then she must complete the 60 monthly payments required, which means 10 more next year. However, in 2005 she had a choice of taking out two months or a full annual distribution, even though the plan did not start until November. IF she took out the entire year’s distribution in 2005, then she will have completed 60 months of payments by the end of this year. In that case, she would have various options for 2010 as follows:
a) take out the full annual amount prior to November, 2010
b) take out the pro rated amount, ie 10 months worth ending with the October installment
c) take out -0-, since she has already taken 60 months and reached 59.5
The plan modification date remains 11/28/2010. But this means that she must comply with one of the available options in 2010, or the plan is busted. But, IF she has already satisfied 60 months of distributions by the end of this year, she has the above 3 options. If she has only taken out 50 months of payments by the end of this year, she is limited to a or b above.
She also can combine the one time RMD switch with two of the options above if she will have taken out 60 months by the end of 2009, ie make the RMD calculation for 2010, and choose a or b for how much of the RMD figure is distributed.
After 11/28/2010, the plan has ended, so she can do anything she pleases with respect to distributions.