72t official end date and start of normal distribution date
If a 72t starts 4/1/2006 asthe first distribution, therefore the last distribution was 3/1/11, can the person take a distribution anytime after that 3/1/11 date after the last 12 payments were taken in the 5th year (as the person is now over 59 1/2) or does the person have to wait until after 4/1/11 to take a regular distribution? Is there a problem with taking a distribution any time after 3/1/11 or do they have to wait until after 4/1/11?
THank you.
Permalink Submitted by Alan Spross on Thu, 2011-03-31 18:06
4/1.
The modification date for a 72t plan is the longer of 5 years from the date of the first distribution or the date taxpayer reaches 59.5. It is never related to the date the last distribution was taken. One easy solution would be to use a 60 day rollover to roll back the recent distribution. Another solution might be found in the options available in the 2011 stub year. The distribution options prior to 4/1 are as follows:
1) If the full annual amount was taken out in 2006 instead of 9 months, no distribution is required in 2011 (but not much help here if they need the money)
2) 3 months worth could be distributed
3) The entire annual amount could be distributed.
So if the taxpayer does not have a rollover available due to the one rollover rule, they could take out the entire annual amount for 2011.
Additional note: There is confusion and little IRS guidance on the proper pro rate amount to take in a final stub year. For a plan ending in April, many people think they should take out the April payment although technically the March payment is the last one if pro rating is used. The IRS has not been busting plans were the taxpayer takes out 4 months worth for a plan ending in April.
Permalink Submitted by Tracy MacKinstry on Fri, 2011-04-01 01:53
72t started 4/1/06 and 60 distributions were taken accoding to the SEPP calculation on her IRA. Her last 60th distribution was 3/1/11. SHe is now over 591/2 and took the calculated 60 distributions for the 5 yr period. On 3/18 she took a distribution of $22,000 now that the SEPPP was done. SHe did not wait until after 4/1/11 which would be exactly 60 months time wise or 5 yrs. Her 60 payments were for $1440 per month from 4/1/06-3/1/11.
thank you
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Permalink Submitted by Alan Spross on Fri, 2011-04-01 02:07
The 3/18 distribution would bust her plan and is also too high to fall under the plan using a full annual distribution for 2011. Therefore, just hope she is eligible for a rollover and she should then roll the distribution back into the plan within the 60 day period allowed. Since 4/1 is already here, she can then take the distribution back out of the plan after 4/1 since the plan will have ended then and the 22,000 will not be penalized since she is over 59.5.
If she is not eligible for the rollover because she has rolled over a prior distribution in the last 12 months, there is still a way out. That would be converting the 22,000 to a Roth IRA and then recharacterizing the conversion back to the TIRA. The reason this works is that a Roth conversion and recharacterization do NOT count with respect to the one rollover limitation.
Sounds like a pain, but it will save over 11,000 in penalties and interest for a busted 72t plan.