72-T premture distribution penalties & interest
My age 55 client is desparate to break his 72-t (4 years of distributions) and take a lump sum distribution to payoff
$ 23,000 of credit cards. His credit is in shambles and he refuses to take bankruptcy. I have done all I can to describe current and retroactive penalties of 10% early withdrawal and interest and he still presses me to make the distribution for him. How can I adequately (1) be specific for the present and future costs he wil incur and (2) protect myself by processing the distribution ?
Permalink Submitted by Alan Spross on Wed, 2011-06-22 20:45
The penalty will be 10% on the entire amount of distributions taken under the plan for the 4 years, and it would be reported on Form 5329 for 2011, with an explanatory statement and breakdown of each tax year’s distributions to be penalized. The IRS will calculate the interest penalty, but for sake of illustration, you could probably use a rate of 5% for each year’s accumulating distribution amounts and not be too far off.
For the tax years that are still open, if he has other penalty exceptions that could replace the 72t exception, those returns could be amended to claim the new exceptions after the busted 72t plan penalty is paid. That might reduce the total penalties and interest somewhat.
Once the annual distribution for 2011 exceeds the 72t calculation, his current plan is broken, and he is free to start another new plan if he wishes, and that may make sense at age 55 if he has the assets to generate a large enough distribution with the current rock bottom interest rates.
If you outline the costs to him, it would be a good idea to have him sign a form that he understands the costs and still wants the distribution. I would also advise him that the chances of getting this by the IRS are very small.
Permalink Submitted by Jennifer Poole on Wed, 2016-03-23 14:33
Can a retired teacher who is only 49 use the 72T rule for her 403b account to take money out without the 10% penalty?
Permalink Submitted by Alan - IRA critic on Wed, 2016-03-23 17:36
In theory yes, but it is risky to use an employer plan because of less control over the plan balance and distributions or of vendor changes than for using an IRA for the 72t plan. If possible, the teacher should do a direct rollover of the plan to an IRA and then start the 72t plan where they will have full control of the IRA account and can get some support from the IRA custodian. If the teacher only needs part of the 403b balance for the 72t plan, they might be able to roll only that portion over to the IRA. 403b plan custodians rarely see a plan used for 72t distributions and therefore probably do not understand them, but the teacher could always have a discussion with the plan before asking for a rollover to see if they can allay any concerns regarding the 72t issues.