72T question

Submitted by Kevin O'Hearn on Fri, 2019-09-06 18:21

Hello,

I have client who started a 72T plan in March of 2015 (RMD method) and the client turned 59 1/2 on 08/28/19. The client was taking monthly payments but increased the amounts in June, July and August to satisfy the 2019 RMD by the time they turned 59 1/2. My question is whether or not the client can stop the 72T plan since they are now 59 1/2 and satisfied the 2019 RMD or would the plan need to run in the first 2 months in 2020 because plan anniversary date would be in March. Is there any guidance out there on how the IRS would view the end date of the 72T plan in this case?

Thank you.



Submitted by Alan - IRA critic on Fri, 2019-09-06 18:58

  • Client’s plan technically ends 5 years from the date of the first distribution. For a 5 year plan (5 years is longer than attaining 59.5) such as this, 60 months worth of correctly timed distributions must be taken to avoid busting the plan. Since client only distributed 10 monthly payments in 2015, and through 2019 will have taken 58 total monthly payments, the client must take out 2 months worth of distributions in 2020 prior to the plan termination date in March. Client could have stopped distributions now had they distributed 12 months worth in 2015, but that did not happen.
  • In many cases with this fact set, the IRA owner will delay distributions in the year they turn 59.5 to after 59.5. If the plan is busted for whatever reason (such as the initial calculation was incorrect, or perhaps a monthly payment is missed and any year ended with 11 months worth, there will be no retroactive penalty for any distributions taken after 59.5. The penalty only applies to distributions prior to 59.5 for which the plan waived the penalty. 

Submitted by Kevin O'Hearn on Fri, 2019-09-06 20:59

Hello,I have client who started a 72T plan in March of 2005 (RMD method) and the client turned 59 1/2 on 08/28/19. The client was taking monthly payments but increased the amounts in June, July and August to satisfy the 2019 RMD by the time they turned 59 1/2. My question is whether or not the client can stop the 72T plan since they are now 59 1/2 and satisfied the 2019 RMD or would the plan need to run in the first 2 months in 2020 because plan anniversary date would be in March. Is there any guidance out there on how the IRS would view the end date of the 72T plan in this case?

Submitted by Alan - IRA critic on Fri, 2019-09-06 23:36

  • The date the plan ends is not necessarily when distributions end. The plan will end 5 years after the date of the first distribution, but distributions can end when all the needed distributions have been taken out.  (I assume that 3/15 was the start, not 3/05 as you stated in the prior post). 5 years of payments (60 months) is always the minimum, but client could have completed 5 years as early as Jan, 2019 if he took the full 12 months for 2019 in January AND distributed 12 months worth in 2015. In that case, the distributions end, but the plan is still in effect until 3/20 and he cannot take another distribution before 3/20.
  • This client apparently only distributed 10 months worth in 2015, therefore he must take 2 months in 2020 prior to mid March in order to meet the 60 month minimum.
  • In the famous case of Arnold v Commissioner (1998), Arnold completed 5 year of distributions in the 5th year of the plan and thought the plan was complete. He then took a large distribution, still within the 5 years before the plan terminated, and the IRS busted the plan. 
  • In summary, this client needs to take a January and Feb monthly distribution in 2020 to meet the 60 month minimum for a 5 year plan. He cannot take any other distributions until after mid March since his plan ends in mid March. There would probably only be about 1 month between his final distribution and the plan termination date in this case. If he simply wants to take 2 months worth in January, 2020 because he probably terminated the monthly payment schedule, he will finish his distributions in January, but the plan still ends in March.
  • The rules for these plans are not consolidated in the tax code or in any one place. Notice 2002-62 includes the basic rules, but the actual details have been developed over the last 25 years through a number of tax court cases and PLRs, as well as IRS administration of plans every year. This results in confusion, and it’s the IRS’ fault due to lack of guidance in any organized fashion. 
  • I assume client has been filing a 5329 to claim the penalty waiver. However, his 1099R for 2020 reporting the 2 months of distributions will probably be coded 7 since he will be past 59.5. So he will not need a 5329 with his 2020 return. He will need one for his 2019 return since his 2019 1099R will be coded 1 just like his 1099R forms for the prior years.

Add new comment

Log in or register to post comments