72t and tax filing

Submitted by Lewis Young on Fri, 2016-03-18 14:57

My client received his 1099R from the custodian which shows the distribution code 1 in box 7. We started the 72t in October 2015 taking monthly payments so it does not show the entire 12 month distribution of course. My client’s CPA is asking me how to file this without penalty and let the IRS know that he is taking 72t payments so as to avoid the 10% penalty? Thank you



Submitted by Alan - IRA critic on Fri, 2016-03-18 17:21

See the other thread on how to complete Form 5329 to claim the 72t plan penalty waiver. Note that client’s total distributions under the plan for 2015 are allowed to be either 3/12 (25%) of the annual calculation or 100% of the annual calculation.

Submitted by john sklenar on Fri, 2016-03-25 21:33

A taxpayer received a 1099R from their custodian which contained 13 payments for 2015. The custodian is to pay out each month on the 3rd. However, because January 3, 2016 falls on Sunday, they backed the withdrawal up to Friday the 31st, in order to pay it on time. It was received by the taxpayer in january, but reported on the 1099R in the prior year. How do we handle on the tax return to avoid the 72t penalty?

Submitted by Alan - IRA critic on Sat, 2016-03-26 01:14

Automatic distributions  for a 72t plan should never be set up in the first or last week of the month for this very reason. However, the IRS has been very agreeable in PLRs of recent years on executory or administrative snafus like this. But while the probability of an exception from the IRS is excellent, the cost of applying for a letter ruling is not almost prohibitive unless you have a huge IRA.  Therefore, I think the taxpayer should report the distributions exactly as shown on the 1099R and simply include an explanatory statement with the return explaining what happened. Of course, 2 years in a row will be off, so the same explanation would need to be included on both tax returns. This does not guarantee a positive result, but makes sense given the cost and time for pursuing a letter ruling.

Submitted by Mike Raitt on Wed, 2016-04-27 23:23

Can i add money to an IRA account that is paying out 72t distributions that was calculated using the fixed amortization single life method? Seems like I can since the 72t distribution amount is calculated 1 time on 1 of the 2 previous months ending balances. Since I have to use 1 of the 2 previous months ending balance and since the 72t amount will never be recalcuated under the above mentioned method, it seems like a new deposit into the account after the selected month-end date would have no impact on the future payments. Seems like everything I read seems to say you can’t make any new additions to the IRA once you start the 72t, but it seems like their would be an exception if I was using this particular 72t calculation method (namely, the “Fixed Amortization Single Life table” method. 

Submitted by Alan - IRA critic on Thu, 2016-04-28 00:18

No contribution can be made to an IRA that is part of a 72t plan or the plan is busted. That applies regardless of calculation method per this quote from RR 2002-62:

(e) Changes to account balance. Under all three methods, substantially equal periodic payments are calculated with respect to an account balance as of the first valuation date selected in paragraph (d) above. Thus, a modification to the series of payments will occur if, after such date, there is (i) any addition to the account balance other than gains or losses, (ii) any nontaxable transfer of a portion of the account balance to another retirement plan, or (iii) a rollover by the taxpayer of the amount received resulting in such amount not being taxable.

However, you CAN make a new contribution to a another IRA account this is not associated with your 72t plan.

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