ending 72t distributions prematurely
Q1: If a husband and wife has separately started 72t distributions in 2011 and they decide to permanently stop these distributions in 2011, can they simply claim the distributions as an early (59 1/2) distribution and not a 72t distribution on their income taxes come April 2012, pay the 10% penalty and have no other adverse consequences of setting up and then discontinuing a 72t arrangement during the same calender year?
Q2: Same scenario as above but…If they receive 3 monthly payments under a 72t in 2011 which was started in 2011 and then stop the 72t permanently in 2011, could they redeposit the last two monthly payments (assuming they were still within the 60 day window), and claim only the first payment as a non 72t, early distribution with a 10% penalty on their income taxes come April 2012?
Permalink Submitted by Alan Spross on Sat, 2011-02-19 00:21
Q 1) Yes, they would just report this as if they never started the plan. The 1099R will be coded the same as if they never started a plan. This is very simple as long as the plan did not start until the current year.
Q 2) Assuming that each spouse took distributions from one IRA account each, then they each are only allowed to rollback one distribution each as that has to be within 60 days. There is a one rollover limit per IRA account within a 12 month period. If they have more than one distribution within 60 days of different amounts, they can choose to roll the larger one back to the IRA. There are other penalty exceptions that might apply to these distributions, eg higher education, high medical costs, insurance premiums if on unemployment, disability etc.
They can also abort the current 72t plan if it was flawed, and start a new one with new calculations, new interest rate etc, although I would transfer was is left to a new IRA account 3 if they want to start a new plan.
Why do they want to end the plans? In certain cases if there were errors they can be rectified without busting the plan if caught this early.