Starting a 72T Distribution

Submitted by Nelie Cruz on Fri, 2022-02-18 19:45

Good morning.

I would like to start a 72T Distribution next month, March 2022 and get money from my IRA account. I was born on August 22, 1966. I got laid off from work last August 22, 2020. I am on SDI right now as I have injury on my hands sustained while I was still working with my last employer. Below are my questions:

1. What is the ending balance that I should use in the calculation of the yearly equal payments? Should I use the February 2022 ending balance? Or should I use the December 2021 ending balance?
2. What is the interest rate that I should use in the calculation?
3. How many yearly equal payments must I receive before I should stop the distribution? And when should I stop the distribution to avoid screwing up my 72T?
4. What IRS forms should I take note when I file my tax returns? What should be the tax code on the 1099R?

Please advise as to anything else that I should know about as I am not so sure I have asked all the right questions?

Thank you so much for your help. I would really appreciate it.

Best regards,
Nelie



Submitted by Nelie Cruz on Fri, 2022-02-18 19:48

I just saw that one of the exceptions to the 10% penalty is disability. What type of disability is qualified to be exempted from the 10% penalty? I wonder if my hand injury can qualify to this?

Submitted by Alan - IRA critic on Fri, 2022-02-18 21:16

If you can get a statement from your MD that you are disabled according to Sec 72(m)(7), then you can use the disability exception to waive the penalty. You will not need a rigid 72t plan.  With that letter in hand, you can override the 1099R Code 1 by filing Form 5329 showing exception code 03. Even better, send a copy of the statement to your IRA custodian and ask them to code the 1099R as a disability distribution, code 3. If you were awarded SS disability benefits, that is another indication that you qualify for code 3.
If your disability does not qualify for the penalty waiver, the interest rate you can use to start a 72t plan next month is 5%, due to IRS Notice 2022-6. That’s about double the 120 fed midterm rate. This interest rate bump will produce a much larger distribution per dollar of IRA balance.
The IRA balance should be for the end of Dec, Jan, or Feb, whichever is higher. Probably 12/31/2021.
You plan would be a 5 year plan because you will reach 59.5 prior to 5 years. You would take a full annual distribution in 2022-2026, nothing in 2027. Your plan modification date will be 5 years from the date of your first 72t distribution, so sometime in March 2027. The plan automatically ends then.  Only tax form needed is the 5329 to override the 1 coding on the 1099R.

Submitted by Nelie Cruz on Fri, 2022-02-18 22:46

So if in case I can get a statement from my MD that I am disabled according to Sec 72(m)(7), I can withdraw any amount of  money from my IRA without any restrictions like that of the 72T? I can also get anytime? If so, this is great news! I hope I can qualify. Thanks so much!

Submitted by Alan - IRA critic on Fri, 2022-02-18 23:45

You should get the statement, but that is just a recommendation in case the IRS asks you to establish your disability status, and it helps to get the custodian to code the 1099R. But even if you do not get the statement, if you feel you meet the definition, you can override the 1099R code using form 5329 and take your chances with the IRS, hoping they never ask when seeing that you are on SSDI.

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