Busting a 72t?
Hello,
I have a husband and wife client who are half-way through the 5-year 72t process. Husband is currently 59 and wife is 61. They have decided they want more money from the IRA’s now. The husbands IRA is $270k and the wife’s IRA is $600k. They are both doing the 72t and my initial thought was to bust the husbands 72t so that the penalty is only on the smaller of the two IRA’s and let the wife ride our the remaining 2.5 years. Thoughts or ideas?
Secondly, since I have never busted a 72t, I recall the 10% early withdrawal penalty will be on the entire amount that was supposed to be taken out over the 5 year period, not just the first 2.5 years?
Thanks!
Permalink Submitted by Alan - IRA critic on Sat, 2021-03-06 17:21
Unless there has been major investment result differences, the husband’s pre age 59.5 distributions have been much less, therefore the retroactive penalty and interest would also be less. It could save them further penalties if he could wait until attaining age 59.5 before taking the extra distribution, since distributions taken after 59.5 are not subject to the penalty.
Beside the penalty and interest for prior 72t distributions, they also must plan for the next 2.5 years. Whichever spouse busts the plan will no longer have a 72t plan, therefore any additional distributions taken by the husband prior to 59.5 will also be subject to the penalty. Therefore, husband should do everything possible to reach 59.5 before taking any more distribution, or if not possible take out successive small amounts to avoid distributing more than needed before 59.5.
For a busted plan, prior returns are not amended. The retroactive penalty is reported on Form 5329 for the year the plan is busted with an explanation. Finally, if husband has any IRA basis (Form 8606), the penalty only applies to the taxable portion of any distributions.
Permalink Submitted by [email protected] on Sat, 2021-03-06 19:20
Thank you!