IRA 72(t) Distribution – Series of Payments (Modification)

Submitted by DAVID WEINTRAUB on Mon, 2013-12-30 19:24

My situation is as follows:
I am an accountant, approaching retirement, due to health issues.

I have been taking monthly distributions under the 72(t) rules – say $2,000 per month – since January 2005.(Each year’s distributions total $24,000; this is the amount reported by the payer (brokerage house) to me on a Form 1099-R annually.)

I reach age 59 1/2 in July 2014. I wish to take an annual distribution of $ 24,000 in January 2014. IS THIS PROPOSED JANUARY 2014 DRAW A “PROHIBITED MODIFICATION” I have stopped the series of monthly $ 2,000 distributions. I received the last $ 2,000 monthly distribution in December 2013 – the current month.

Can I take this January 2014 a distribution in the annual amount of $ 24,000? Would I be considered to have made a prohibited modification to my SEPP 72(t) distribution series, and incur early distribution (10%) penalties?

Note that here the 2014 Form 1099-R will report the same $ 24,000 as annual amounts in preceding years using code 1 or 2 in Box 7.

If you cite that this is a prohibited (modification) transaction, then how much must I take out in 2014 prior to attaining age 59 1/2 in July 2014? Should this be drawn in the same $ 2,000 monthly amounts ( a total of $ 12,000 drawn in 2014 for the six months preceding July, or can I draw the $ 12,000 (or even $ 24,000 )at any time in 2014 prior to attaining age 59 1/2 under the SEPP rules, without penalty – the $ 24,000 is what I would like to do?



Submitted by Alan - IRA critic on Mon, 2013-12-30 20:23

Since you have already taken more than 60 months of distributions, you have flexibility in the time period between 1/1 and your plan modification date in July. You can either distribute the full annual of 24,000, the pro rate 6 month amount of 12,000 or nothing at all. The distribution pattern (eg monthly, quarterly etc) is immaterial, only the actual amount distributed is critical, but you have the 3 choices including the 24,000 distribution in January. You would handle the 1099R in the same way you have in the past, ie if you don’t get the 2 code in Box 7 that most custodians do not provide, then you would file Form 5329 claiming the exception code 02 for the penalty waiver.  After you reach 59.5, you can do anything you wish, but if you take distributions after that you would get a different 1099R coded 7.

Submitted by DAVID WEINTRAUB on Mon, 2013-12-30 21:05

Thank you so much ! Would you possibly have a source that discusses this-i.e. IRC, Regs, IRS Publication, etc ?

Submitted by Alan - IRA critic on Mon, 2013-12-30 22:53

  • David, unfortunately the IRS has published a minimum of information on these plan other than RR 2002-62. The remainder of the rules that the IRS appears to use have evolved over the last two decades through letter rulings. The consensus of the few experts is that the above 3 options exist in a final stub year. The preeminent site for 72t plan information is here:  http://www.72t.net/Articles/ArticleShow.aspx?WA=b9fcc9c2-e772-46fa-9a57-ca380ff5a0b3
  • You could do a search of the forum posts there under “final stub year distribution options” or similar. Actually, while all 3 options have not caused a problem and posters report no IRS concern over any of these options, the one you want to use is likely to be the safest of any of them because you are just withdrawing the same amount you always have.

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