72(t) – 5 Year Plan final year distribution amount
I have a client that started taking 72(t) distributions on 2/14/2016 at age 58. In her first year she elected to receive a full year distribution starting with $4,000 on 2/14/2016 and $2,000 a month for the rest of the year ($24,000 total for the year). Her 1099Rs for 2016, 2017, 2018, 2019, and 2020 all report a $24,000 annual distribution.
She received a 1/4/2021 gross distribution of $2,000 ($1,800 to her and $200 to the IRS).
Is the 1/4/2021 distribution a modification of her plan since she has already received 5 years (60 months) of payments or is it the last payment of the Substantially Equal Periodic Payments stream?
I have read several posts that state you have options in the last Stub year. Those posts generally deal with the year the taxpayer turns 59.5 and not a 5 Year Plan. Is there a difference in final year options?
She still has time in her 60-day rollover window to redeposit the $2,000. However, if the payment needs to be made, I’m afraid a rollover might get her in trouble.
Any input or clarity would be much appreciated. I am starting to drive myself a little crazy trying to figure it out.
Permalink Submitted by Alan - IRA critic on Thu, 2021-02-04 14:21
For a 5 year plan, it is best to take out only 60 months worth. However, I have not heard of any cases where the IRS has busted 72t plans when the former distribution pattern has been extended resulting in more than 60 monthly distributions during the plan period. Likewise, if she also received another monthly distribution prior to 2/14, there should be no problem.
If she withdraws more than her total annual calculation prior to 2/14, that would certainly bust the plan.
The IRS has not issued coordinated guidelines for these plans since RR 2002-62. There have been several PLRs since, but mainly the IRS pattern of enforcement in recent years is the only way to determine how they will react to the gray areas.
I would not try to roll back the January distribution, as I think that would increase the very small risk here. If the IRS did view the January distribution as a legit 72t distribution, then it would not be eligible for rollover because you cannot roll over a 72t distribution. Would just leave things as they are.
While I do not expect a problem, note that if her plan was busted by the IRS, she would only owe the retroactive penalty and interest for distributions taken PRIOR to reaching 59.5.
With most custodians, the January distribution would be reported with code 7 on the 1099R, and any distributions she takes in 2021 after 2/14 would be added to the same 1099R. For distributions she took prior to 59.5, she probably received a code 1 and had to file a 5329 to claim the 72t penalty exception. Since the 5329 is used to file exceptions to the penalty, if she has been receiving code 7 for distributions post 59.5 there is no need to file the 5329.