72T Stopping it and buying a life annuity
Can you stop a 72T plan after a year and a half and pay the 10% penalty of the monies withdraw and the buy a life annuity without a penalty before 59 1/2
Can you stop a 72T plan after a year and a half and pay the 10% penalty of the monies withdraw and the buy a life annuity without a penalty before 59 1/2
Permalink Submitted by Alan - IRA critic on Fri, 2018-10-26 18:25
You can voluntarily bust any 72t plan for any reason, but retroactive penalty and interest will apply to the penalty free distributions already taken. As of an immediate annuity, if the annuity is purchased with IRA funds, there is no penalty waiver since IRA taxation rules apply instead of non qualified annuity tax rules. With IRA money, a series of substantially equal payments (SEPP) must be calculated using one of the 3 methods in RR 2002-62. All of these methods produce a specific dollar distribution. The amount of the distribution cannot be some other amount, so if you already have a 72t plan, you should stick with it. If you want to lower your distribution you could do a one time switch to the RMD method effective Jan 1, 2019 or if you have not yet taken out more than the RMD method for 2018, you could make the switch retroactive to 1/1/2018.
Permalink Submitted by Scott Lojewski on Fri, 2018-10-26 20:03
How would you calculate the interest on say $24,000.00 taken out in 17 months 10% easy $2,400.00
Permalink Submitted by Alan - IRA critic on Sat, 2018-10-27 01:16
Interest would be quite small on only 17 months of penalties since there is no charge for the first year. The applicable long term federal rate is used, but I do not know how compounding is handled. If you decide you are going to bust the plan do not delay in paying the penalty since delay could result in the IRS also levying the accuracy related penalty equal to 20% of the additional tax owed (20% of 2400 = 480).
Permalink Submitted by Scott Lojewski on Mon, 2018-10-29 12:37
If I where to buy an immedate annuity within the ira that the 72t program is set up and after say 4 years the payment from the annuity is higher than the calculated payout would that be a bust.. say the calculated amount was $1,300 a month at the begining of the program and then 4 years in my calculated amount is now $1,200 a month but my annuity is still bringin in 1,300 a month.
Permalink Submitted by Alan - IRA critic on Mon, 2018-10-29 15:39
Yes, that would bust the plan. If an SPIA was purchased in a 72t plan it would be a total fluke if the payout exactly matched the 72t calculation. While not recommended, if the SPIA was structured not to distribute the payout but instead to transfer it into your 72t account, then there would be no distribution and if you had enough other non annuitized assets in the account you could make the distribution from those assets. It would probably be a challenge to get an insurance company to agree to such a structure. Also, 4 years in is obviously too late for that since the 72t has already been busted. A particular risk is that the IRS does not catch the bust allowing the retroactive penalty and interest to build up, then discovers it late in the plan.