Reducing 72T Systematic Payment to reach age 59 & 1/2
FACTS:
I have a client who started a Systematic Withdrawal Plan under IRC Section 72T. The client was 34 years old when commencement of withdrawals began. Client is now age 42.
When the calculation was made in 2006 the client was able to take a gross distribution of approximately $7,000.00 per month. All withdrawals occurred consistently on a monthly basis (with no prior modifications or additional withdrawals, nor change of account or custodian). Due to market drop of 2008- 2009 and moving to a much more conservative posture; the account only has $6,000.00 left after the June 2014 payment is sent out.
QUESTION:
At this juncture can a recalculation be made to stretch the last $6,000.00 over the next 17 & 1/2 years till the client reaches age 59 & 1/2 and avoid a retroactive 10% Excise Tax Penalty for early withdrawal on all prior distributions???
Permalink Submitted by Alan - IRA critic on Fri, 2014-06-06 17:10
I guess the only positive after the account has this much of a loss is that once the account is drained, the 72t automatically terminates without penalty because there is nothing more that can be distributed. So he might as well withdraw the balance, although he could also make the one time switch to the RMD method and that would lower his calculation to just a few bucks. But I cannot see doing these annual calculations with the risk that one of them is done wrong and thereby exposes client to the retroactive penalty and interest on thousands of dollars. I would recommend he just distribute the balance and include an explanatory statement with his tax return that the entire balance has been distributed ending the plan. He should also not use this account number again and should not transfer any other retirement funds into the old 72t account.