She has various options. Why does she want to stop it? Does she then want to start another 72t plan?

• Flag as spam
• Log in to Reply

It seems odd that an IRA would be in danger of running out of assets after only 2 years of taking distributions less than 6% of the original value. But if the account goes to 0, there is no penalty, the 72t plan simply ends.

If she wants to adjust the distribution downward, the one time switch to the RMD method would result in a huge reduction in the plan payment, and there is no penalty. This could be done as of 2010 retroactively to 1/1 at this early date.

But if she voluntarily stopped the plan altogether, she would owe retroactive penalties on all distributions from the beginning of the plan. She could report a voluntarily busted plan on her 2009 tax return on Form 5329 and pay the penalties from 2008 and 2009.

But a decision should not be made until her future cash needs are considered. Where will the future distributions come from? How long until reaching 59.5 etc.

• Flag as spam
• Log in to Reply

Hi Mary Kay,

I think the IRS may have left us with some confusing instructions on when to report these retroactive penalties:

1) From IRS site re 2002-62:

>>>>>>>>>>>>>>>>>>>>>>>>
What is the exception in section 72(t)(2)(A)(iv)?

Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in section 72(t)(1) will not be applicable. Pursuant to section 72(t)(5), in the case of distributions from an IRA, the IRA owner is substituted for the employee for purposes of applying this exception. Section 72(t)(4) provides that if the series of substantially equal periodic payments that is otherwise excepted from the 10-percent tax is subsequently modified (other than by reason of death or disability) within a 5-year period beginning on the date of the first payment, or, if later, age 59½, the exception to the 10-percent tax does not apply, and the taxpayer’s tax for the year of modification shall be increased by an amount which, but for the exception, would have been imposed, plus interest for the deferral period.

>>>>>>>>>>>>>>>>>>>>>>>

Note that this specifies reporting in the year of modification (ie 2009). The 5329 would need a detailed itemizing statement for all the years involved in the deferral period. But on p 52 of Pub 590, “recapture tax” et al it indicates “the recapture tax applies to the first tax year to which the change applies.” We know it applies to all the intervening years as well, but I think the IRS is mixing up the period it applies to, with the year it is to be reported.

Or perhaps you were suggesting it be reported with a 5329 for each year? This poster had only two years in the plan. A 5329 for each year might be the best solution for clarity.

It may not matter. With the detailed explanatory statement with the 5329, the IRS would either be reconciling forward to the modification year or backward from the modification year to the first year. If you go with the actual 72(t)4 verbiage, that should override the 590 publication.

• Flag as spam
• Log in to Reply