72t Repair Exemptions
Hello all,
Here’s the question/scenario. Client age 52 establishes a 72t using amortization method. 4 years later calls IRA custodian and requests a reduction in the withdrawal amount but in doing so the resulting withdrawal amount is too high to qualify for the standing RMD withdrawal rate, and too low to remain consistent with the previously established amortization method. Hence in 2009 the IRA custodian codes the 1099R as “premature” not qualified as a 72t withdrawal Further the IRA custodian is of the opinion that they need to re-issue the prior 3 years 1009R s similarly also triggering a 10% penalty tax.
QUESTION: Does anyone know a reliable tax code or PLR that would allow the client to minimize their tax consequences as the IRA Custodian is proposing as mentioned above. Client would ideally maybe like to just show the Custodian authority to Not re-issue the back 1099s triggering penalties, and instead also just be allowed to pay the tax on the small shortfall for 2009 and then change to the RMD for 2010 going forward.
Please let us know if you have something positive to contribute to this scenario.
Permalink Submitted by Alan Spross on Tue, 2010-05-11 22:20
Not much positive to suggest here, just a long shot position to consider.
Although RR 2002-62 appears to suggest that the one time switch to the MD method can only be made for a subsequent calendar year, I believe that some taxpayers have made the switch mid year. While this is grasping at straws, he could determine the % dollar difference between the two methods and figure out the day of the year that he would generate the amount he took out as the effective date of the switch to MD in 2009.
For example:
1) Prior fixed dollar distribution 36,000 (3k per month)
2) RMD method distribution 24,000 (2k per month)
3) Amount distributed 27,000 – this equates to a change on April 1st to the MD method.
He would use a reasonable account balance between 12/31 of the prior year and 4/1 to back into the MD calculation.
If the math calculations can be developed, he could file a 5329 to claim the exception and add that he made the switch to MD on xx/xx/2009. The timing is also convenient that about this time his account balance was probably hammered by the market collapse and he might generate some IRS sympathy with his position. Probably not worth the cost of pursuing a formal letter ruling ($10,000 plus), or worth the effort to get the custodian to buy into this plan. The custodian does not have to buy in, the plan is between the taxpayer and the IRS with the taxpayer reporting his exception on Form 5329 (Exception Code 02).
While it does not change his cost to bust the plan, the IRA custodian should not be issuing revised prior year 1099R forms. They should just code 2009 as Code 1 and that should trigger the retroactive penalty and interest which he would otherwise have to report IF HE DOES NOT PURSUE THE ABOVE LONG SHOT APPROACH. If he decides to just pay the penalty, he could report a busted plan as of 12/31/09 (PLR 1999 09059), and start a new plan in 2010.
I am also curious what the custodian told him when he requested a reduction in withdrawal amount. For a while confusion existed whether the RMD waiver for 2009 applied to 72t plans under the MD method. It took awhile for the IRS to clarify that the waiver did NOT apply to 72t plans.