Excess IRA Distributions in Excess of Normal 72T Payment

Submitted by Harley Hunter on Thu, 2017-04-06 21:46

Client age 61 (DOB 9/16/55) requested $25k from IRA custodian 1/17. Custodian paid it 2/1/17. Prior to that client was receiving monthly 72T distributions of $1667.50/mo ($20k/yr) since 9/5/12 start date. 5 yrs will be up 9/5/17. Can the client assume $13340 (8 months Feb thru 9/5/17) of the $25k to be the remaining 8 months of required 72T distribution & ask the custodian to stop all further 72T distributions? If so, how does he treat the remaining $11660 & how will the IRS treat it? How should his CPA report this on his 2017 taxes? When will the IRS or how does the IRS become aware of this extra distribution in excess of the 72T normal payment? Has he busted the plan & is now subject to a 10% penalty on $100k? If so, when is the $10k due the IRS so as not to incur any further penalties & interest? Is 10% also due on the excess $11660?

What other options does he have? How will the rest of the money in his IRA be treated? Will it still (assuming he takes no further distributions until age 70.5) grow tax deferred until he is required to take at least his RMDs? OR could he request his custodian start paying him annually in 2018 an amount in excess of his RMDs at age 70.5 & only have to pay the then current taxes due on the distributions?

So as to advise other clients correctly on 72T distributions, is it correct to say that they must ONLY take the 72T distribution & no other distributions from the plan for an absolute minimum of 5 yrs or age 59.5 whichever is longer & from there, they can stop it, request an annual payment of some other amount, request no distributions or take some periodically or take no distributions til age 70.5?

Thank you for addressing all the above.

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Permalink Submitted by Alan - IRA critic on Thu, 2017-04-06 23:39

Client had a 5 year SEPP plan which would have been completed by taking out the usual 8 monthly payments ending in August, 2017. Since client has taken out even more than the annual amount and 60 days since receipt of the 2/1 distribution has now passed, the plan has been busted. Since the plan has been busted and it will be obvious to the IRS once the 1099R is issued next January client should prepare to report a busted plan on his 2017 taxes. He will owe the retroactive penalty on all distributions taken under the plan that were actually distributed BEFORE he reached 59.5, but those he distributed after 59.5 will not be subject to the penalty. He would report the penalty on a 2017 5329 form for those pre 59.5 distributions. He does not have to amend any earlier returns. The IRS may or may not decide to bill late interest charges on the late payment of the retroactive penalty. Since his plan has been busted, he has no retrictions at all from here out. He can take out whatever he needs, but there is no benefit for taking out more than he needs. Too bad he did not wait until September to take out the additional distribution. His IRA is not otherwise impaired and the only downside here is that he owes the penalty on about 2.5 years of distributions. That means that some of the distributed amounts in 2015 will be subject to the penalty, but distributions taken after 3/14/2016 will not be subject to the penalty since he was 59.5 for those distributions.
Yes, your final paragraph is correct. Once the modification date of the plan passes (longer of 5 years or 59.5) the plan is over and client can then take out as much or as little as they wish going forward.

Permalink Submitted by Ben Meyer on Sat, 2017-04-08 14:04

Can the extra distribution be replaced back into the plan after the 60 day period by utilization of RP 2016-47, if the client qualifies for one of the conditions for self-certification? If so, would the plan then be restored, not busted?

Permalink Submitted by Alan - IRA critic on Sat, 2017-04-08 17:53

Benn, the plan could be restored using the RP after 60 days just as it could using a 60 day rollover prior to 60 days. The rollover (also subject to the one rollover limitation) would be reported on Form 1040 like any other rollover and could be used to reduce the gross distribution to the 72t calculated amount even if the roll back was completed in the following calendar year. Since the IRS has busted 72t plans a couple times in the past for partial transfers, there is some risk in not rolling the amount back to the 72t IRA account that distributed it. While a 72t distribution is not eligible for rollover, the IRS does not treat rollover contributions as ineligible under this rule unless the distributed amount falls short of the required annual amount at the end of the year due to a rollover. Taxpayers with an active 72t should generally save their one allowed 60 day rollover for correcting an error if they discover within 60 days that they distributed too much due to math error or otherwise.