72(t) Violation
54 year old client violates 72(t) by taking an additional payment, client wishes to reset his 72(t) distribution. What account balance must be used? Would the current rates be used?
In addition to Mary Kay’s excellent response, depending on the timing of the distribution that busted the former plan, it might be possible to declare a voluntarily busted plan as of 12/31/2009 on the 2009 return, and start a new plan this year that could incorporate distributions already taken this year. That would prevent a penalty on amounts taken out this year if those amount can be incorporated into a new plan based on the proper account balance and interest rate for the month of the first distribution this year. The documentation of the new plan would have to fit all the parameters required, for the date of the first 2010 distribution. The IRS does not have to know that you did not consider this possibility when you actually took that first 2010 distribution because there is nothing in the tax code that requires your plan to match up to your intent at the time. If the plan meets requirements of your documentation, it will be OK if your assumptions are OK. If the plan meets your intent, but the assumptions are wrong, then you have another busted plan. Obviously, this flexibility is very limited in time because each month that passes makes it more unlikely you will be able to make the amounts already taken conform to 72t requirements. Also, remember that a new plan allows taking out either a full annual distribution or a pro rated distribution based on the month of the first plan distribution, and this provides further flexibility for the new plan.
Finally, there has been some relief granted if the error that caused the extra payment was due to IRA custodian error and not taxpayer error. If the extra payment occurred in 2010, a busted plan can be prevented by simply skipping one payment. There is no requirement that each monthly distribution be equal, just the annual total must be correct.
A voluntary busted plan was covered in PLR 1999 09059.
Permalink Submitted by mk foss on Thu, 2010-04-08 21:31
If the individual violates the 72t payment stream, he would pay the 10% penalty plus interest for all of the years the arrangement was in place.
When starting up again, he can determine the beginning balance and starting date. For instance, if he took 13 payments in 2009, and the remaining balance in that IRA is $405,000. He could start as of May 1 for example with a balance of $400,000 by having the amount for the new 72t transferred to a new IRA. It’s always best to have one IRA the 72t payments are based on and another “emergency” IRA. The other IRA could be used if he qualifies for another exception to the 10% penalty – such as higher education or to draw on if he needs an extra payment and doesn’t want to violate the new 72t arrangement.
I think the best way to do this is to determine how much the person needs per month or per year and use the reverse calculators at 72t.net to determine the initial balance needed. Because this is a new 72t series, the current interest rate would be used. That information can also be found at 72t.net