72t Distribution
Prospective client is 57 years old and would like to withdraw money from his IRA to supplement his income. The amount he would like to withdraw is more than any amounts produced by the 3 caluculation methods. His plan is to only withdraw for a couple of years until other sources of income become available. I understand the rules for 72t distributions having to last for 5 years or until 59 1/2 which is ever is longer. What is the rule or result of an IRA account being completely depleted before the 5 years or 59 1/2 requirement? How does that affect the 72t distribution and 10% penalty?
Permalink Submitted by Alan Spross on Tue, 2010-06-08 17:08
If the IRA account or accounts that constitute a 72t plan are depleted, the plan simply ends without penalty.
That said, the only way accounts would be fully depleted would be through disastrous investment results. If the account is depleted due to distributions in excess of those dictated by the 72t calculation the retroactive penalties still apply.
Note that a plan started for a client after age 54.5 must run for 5 years before modification, but IF the plan is busted the retroactive penalty and interest only applies to distributions taken prior to age 59.5. Despite the reduced potential penalties, starting a plan at 57 plus would normally be a last resort to other potential sources of income such as loans etc. If client has an employer plan from which he separated in the year he turned 55 or later, distributions can be taken directly from that plan without penalty. Some people overlook that option, roll over those plans to an IRA and are then forced into the restrictive requirements of a 72t plan.
Permalink Submitted by Allen Broyles on Tue, 2010-06-08 17:15
Thanks. That is a big help.